IFS warns over public sector

Fiscal consolidation needs to be embedded in a comprehensive package that also promotes growth. Further structural reforms are key to a stronger, more inclusive and prosperous Britain.

Fairness is important to ensure public support for the necessary fiscal consolidation effort, which will need to be sustained over a protracted period.

Restraint on spending on public services, imposed by the budget situation, will hit the poor hardest, as their consumption of public services is higher relative to their income than for the more affluent and they have less access to alternative services.

The IFS report shows how badly the Government's plan has failed. By choking off the recovery the Chancellor is now borrowing billions more than he planned as the costs of economic failure mount.

The IFS also confirms that changes this April – including a tax giveaway to millionaires while tax credits are cut for millions of working families – are regressive and will see the richest tenth gain most while the bottom 50 per cent lose.

This kind of trickle-down economics just isn’t going to work. After two and a half years of stagnation it's time we finally had a plan for jobs and growth to kick-start this flatlining economy. The longer this economic failure continues the longer families and businesses will pay the price."

The effects of concentrating all those cuts on currently unprotected areas of public service spending look hard to contemplate.

A more likely scenario perhaps is that other choices will be made after the next election.

Taxes could rise, hitherto protected elements of public spending, like the NHS and pensions, could be hit, or the date at which we reach fiscal balance will be pushed further out.

He will be borrowing £64 billion more in 2014-15 than he planned just two years ago. This is because he is choosing not to offset the forecast deterioration of £65 billion driven by a worse economic outlook. Announced policy measures will reduce borrowing by just £1 billion. As a result he is on course to miss his own target of debt falling in 2015.

Indeed he is now pursuing a looser policy than that permitted by the last government’s Fiscal Responsibility Act. Had he not repealed that legislation he would have been obliged to cut spending or increase taxes by around an additional £8 billion next year.

Departments are planning to cut pay bills quicker than other forms of spending and so far they are doing it through reducing employment much more than through real pay cuts.

This means that public sector jobs look likely to be cut faster than implied by Office for Budget Responsibility forecasts. If departments continue to cut their pay bills beyond 2014-15 at the rate they are currently planning then public sector employment would fall by 1.2 million by 2017-8, rather than by 900,000 as the OBR forecasts.

Current spending plans imply an average cut in public service spending of one third across unprotected Whitehall departments, i.e. all excluding health, schools and overseas aid, by 2017–18. If the defence equipment budget were to be added to the list of protected areas then spending in unprotected areas would need to fall by around 35%.