Sobering warning to face reality of future cuts

Richard Edgar

Former Economics Editor

The Institute for Fiscal Studies warns the majority of George Osborne's austerity measures are still to take effect. Credit: Oli Scarff/PA Wire

If you've been following economic news even only vaguely over the past few months you'll know that it's been pretty good. The economy is growing, unemployment is falling, house prices are rising (a bit too quickly in some places) and inflation has been falling.

After years of crisis and stagnation you'd be forgiven for dabbing your brow and sighing with relief.

But the economic think tank, the Institute for Fiscal Studies, warns this would be premature. In its Green Budget, published today, it sets out the work still to be done to balance the Government's books if the Chancellor continues with his plans to eliminate the additional borrowing it needs each year by 2018 and then to start gradually paying down the national debt pile.

We already know that, by April, only 40 per cent of the austerity cuts already announced will have happened ­ we'll not even be halfway through austerity. Sixty per cent is due to fall by 2018.

But on top of that the IFS has been examining spending promises made by the Government and the opposition; demographic changes that will force higher spending; and aspirations to lower the tax burden made by the Conservatives and Labour.

The IFS paints a worrying picture. Here's its summary:

  • "The Government has already made additional spending commitments of more than £6 billion a year after 2015­16 ­ implying additional cuts elsewhere."

  • "The population is projected to grow by about 3.5 million between 2010 and 2018. So while public service spending is set to fall by 1.7% a year over this period, public service spending per person is set to fall by 2.4% a year."

  • "Over the same period, the number of individuals aged 65 and over - who, on average, place greater demands on the NHS - is set to grow by two million. We calculate that, even if the overall NHS budget continues to be frozen in real terms, real age-adjusted health spending per person would be 9% lower in 2018­19 than in 2010­11."

In other words, the Government will have to make cuts to pay for the extra spending it has announced. A growing but ageing population places a higher burden on the Government's coffers meaning there will be less to go around.

Furthermore, the IFS highlights tax cuts both the Government and Labour have promised: for example, raising the tax-free threshold on incomes and a 10p tax rate respectively. These are very expensive and miss the very people they are meant to help. One in six workers earn too little to pay any tax at all so tax cuts miss them altogether. In fact only 15 per cent of any further tax cuts would benefit people in the bottom half of incomes.

The report cast doubt on the benefit of cross-party commitment to childcare spending. Credit: Edmond Terakopian/PA Wire

Finally, the IFS criticises efforts being made by both Labour and the Government to help with childcare. It's expensive and there is "little evidence" to show that it achieves its aims to encourage women back in to work.

I think the IFS Green Budget serves us with a reminder of the huge problems the country still faces even as the economy recovers. As we approach the election next year both the Government and opposition are offering the same recipe of cuts to public services to bring borrowing and eventually debt under control. Yet neither side is clear about the scale of those cuts or where they will have to fall. As austerity continues they may find that public opinion turns and voters are less and less happy to accept cuts in public services.