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Public spending per person to fall 2.4% a year – IFS

Public service spending per person is set to fall by 2.4% a year, the Institute for Fiscal Studies (IFS)’s new Green Budget 2014 shows. It also suggested that austerity measures could be stronger than necessary.

Funded by the Nuffield Foundation and produced in collaboration with Oxford Economics, the report found that with the population expected to grow and more cuts implied to meet additional spending commitments, service spending per person will have to reduce.

Andrew Goodwin, senior economist at Oxford Economics, said: “Our forecast also emphasises the problems associated with targeting a cyclically-adjusted measure of borrowing.

“Oxford Economics analysis suggests that the economy has a significantly larger amount of spare capacity than the OBR estimates which, in turn, suggests that the medicine of austerity could end up being applied in a dose higher than the patient actually needs.”

Growth is expected to be 2.6% in 2014, and based on more balanced sources, but debt will continue to be a constraint. The Chancellor is planning to borrow much more than initially intended – £96bn in 2014-15 compared to £59bn planned in 2010. National debt would also only return to pre-crisis levels in the mid-2030s.

The IFS cautioned that any further significant increases in personal tax allowance would be expensive and poorly targeted at helping the low paid. It added that current support for childcare is not well designed, with little known about the effectiveness of schemes in improving outcomes for poorer children and helping mothers back to work.

Goodwin added: “The UK recovery is getting ever closer to achieving ‘escape velocity’, although the unbalanced nature of the recovery to date emphasises the need to avoid complacency. Nevertheless, we believe that an improving global outlook will provide the basis for the recovery to broaden out this year, by supporting export growth and giving firms the confidence to invest their large cash piles.”

Paul Johnson, IFS director, commented: “Returning growth, and forecasts suggesting we should be running a budget surplus by 2018-19, should not lull us into a false sense that all is now well with the public finances.

“The outstanding debt will still be very large and the scale of additional spending cuts required to hit that budget surplus remains hugely challenging, especially on top of cuts already delivered. A combination of significant additional spending pledges already made and a growing and ageing population will only add to the challenge.”

Carl Emmerson, IFS deputy director, said: “Despite the state of the public finances, tax cuts and spending increases are being considered by government and opposition. They seem agreed in promising additional spending on childcare despite a remarkable lack of evidence as to its effectiveness.

“They seem equally set on further cuts in income tax either though more increases in the personal allowance or the introduction of a 10p starting rate. Either could be expensive and would be poorly targeted on the low paid.”

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