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26.11.12

Austerity could continue until 2018 – IFS

The squeeze in public spending may continue until 2018 if the recent deterioration in growth prospects and tax receipts turns out to be permanent, according to a new report.

Independent think tank the Institute for Fiscal Studies found that further cuts could bring “more fiscal pain”. The report states that there is “now a weaker outlook for the UK economy” and that if recent trends continue, chancellor George Osborne will need to find £11bn in tax rises or spending cuts. He is due to give his autumn statement on December 5.

The IFS sets out two scenarios for the economy in the report.

Firstly, a relatively optimistic scenario, where the increase in borrowing and deterioration in growth prospects is temporary. No further action above that already planned would be needed for Osborne to meet his fiscal mandate of balancing the budget by the end of a rolling five-year period. However, he has already discussed the possibility of welfare cuts of £8bn over the two years from 2015-16 to 2016-17.

Secondly, a relatively pessimistic scenario, in which the undershoot in tax receipts and the deterioration in growth prospects turn out to be permanent. To meet the mandate would require extending the squeeze on public spending to 2017-18 and implementing a further £11bn of tax increases or welfare cuts.

Carl Emmerson, deputy director of the IFS, said: “Since the Budget, the outlook for the UK economy has deteriorated and government receipts have disappointed by even more than this year's weak growth would normally suggest.

“As a result, the Chancellor might find himself having to abandon one of his fiscal targets. If much of the additional weakness this year feeds into a permanently higher outlook for borrowing, then in order to comply with his other fiscal target Mr Osborne would need to announce yet more tax rises or spending cuts for the next parliament in next week's Autumn Statement.

“In that case the planned era of austerity could run for eight years – from 2010-11 to 2017-18.”

A Treasury spokesperson said: “Action taken by the Government has cut the deficit by a quarter, whilst over a million new jobs have been created in the private sector, inflation is down, and the economy is healing.”

For the full report, please see; http://www.ifs.org.uk/publications/6453

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