IFS: “Volatile” tax revenues could force George Osborne to make further spending cuts

Institute for Fiscal Studies warns that “very inflexible” fiscal target could "come at a cost", while rising demand for services and public sector employment costs will make implementing cuts harder

George Osborne’s target of a budget surplus is vulnerable to “volatile and uncertain” tax revenues, the Institute for Fiscal Studies has said.

The latest official forecast estimates a £10bn surplus by 2019/20, and Osborne has passed a new fiscal charter that requires future governments not to run a deficit “in normal times”.

The IFS today warned the chancellor could have to make last-minute increases in taxes or cuts to public spending in order to meet his pledge.

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The thinktank’s Green Budget paper said if the Bank of England’s most recent downgrade to earnings growth is borne out, that would cut £5bn from the Exchequer’s income by 2019/20.

Additionally, lower equity prices since the summer’s Budget imply a £2bn reduction in tax receipts over the same period.

The document described the fiscal target as “very inflexible” and warned it “could come at a cost”.

“It could require big tax rises or spending cuts with very little notice in order to ensure it is met,” the IFS said.  

“Even if the chancellor gets to the March 2019 Budget with his plans intact, past errors in official forecasts suggest that there would be more than a one-in-four chance that he would need to implement in-year tax rises or spending cuts to deliver a budget surplus in 2019–20.”

The paper also highlighted the risks which could mean even planned public sector spending cuts are not delivered.

Central and local government are due to cut public service spending by 1% in real terms between 2015-16 and 2019-20 – a smaller and slower reduction than in the last Parliament,

Nevertheless, the IFS notes: “The fact that many of the same departments will be delivering cuts in this parliament as in the last may make the new cuts harder to achieve, as these departments now have smaller budgets and presumably the easiest, and most costless, cuts will have already been done.”

In addition, it said, spending on public services will be reduced to its lowest share of national income for over 60 years, at a time when the UK’s population continues to grow and age.

“Rising demand for public services, private sector wage growth and other cost pressures on public sector employers – most obviously the April 2016 rise in National Insurance contributions for the employers of those contracted out into defined benefit pensions – will all make sticking to the intended spending plans more difficult,” said the report.

The effect of continued pay restraint in the public sector compared to rising wages in the private sector could “result in difficulties for public sector employers trying to recruit, retain and motivate highquality workers, and raises the possibility of (further) industrial relations issues,” it added.

Paul Johnson, the director of the IFS, said: “Mr Osborne’s new fiscal charter is much more constraining than his previous fiscal rules.

“Uncertainty in the fiscal forecasts means that he may well have to cut spending further or raise taxes to get to surplus in 2019–20. With public spending reaching historically low levels relative to national income, promises on tax cuts to keep and pay for, and pressure on revenues from a number of taxes, there may be more tough decisions to come.

“How he responds to any further unpleasant fiscal surprises may, more than anything we have seen so far, come to define his period as chancellor.”

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