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  1. ITV Report

Chancellor's 'inflexible' budget gives rise to tax hike risk, economists warn

The Chancellor's own fiscal rules mean he will need to hike taxes or make deeper spending cuts if he is to meet his economic targets, according to economists.

The Institute for Fiscal Studies (IFS) said that George Osborne's pledge to balance the books by 2019/20 would be a challenge and that he had left himself little room to manoeuvre amid current market uncertainty.

The IFS warned of a one-in-four chance of tax hikes or further spending cuts if the Chancellor is to meet his tagets Credit: PA

Current forecasts envisage a surplus of just £10 billion - or 0.5% of national income - for the last year of this parliament, leaving little room for error.

The IFS warned there was a one-in-four chance the Chancellor would need to hike taxes or slash spending further if he is to make his plans work.

"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," Paul Johnson, IFS director, said.

The IFS warned the Chancellor, who is due to deliver his budget next month, faces a number of challenges including:

  • That if earnings increase by just 1% less than his forecasts the Exchequer could lose £5bn in income tax and national insurance.
  • That public sector employers, such as the NHS and schools, will need to find more than £3 billion a year from 2016/17 to pay planned higher National Insurance contributions.
  • That public sector wages will need to rise by no more than 1% a year which "may prove difficult to sustain".

Also speaking at the launch of of the IFS Green Budget 2016 in London's Guildhall, Andrew Goodwin from Oxford Economics, which contributed to the report, warned that austerity was "far too tight".

He warned that events such as a British exit from the EU - or even a run of opinion polls favouring a leave vote in the upcoming referendum - could undermine business investment as firms prepare for a period of uncertainty, affecting economic growth.

The IFS predictions suggest a such economic uncertainly could derail the Chancellor's plans.

Last week the Bank of England cut its forecast for economic growth this year to 2.2%, down from 2.5%.

The Treasury has played down the concerns, with a spokesman saying: "The latest growth figures show that despite turbulence in the global economy, Britain is pushing ahead.

"With the risks we see elsewhere in the world, there may be bumpy times ahead - so here in the UK we must stick to the plan that's cutting the deficit, attracting business investment and creating jobs."