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Warning of 'hugely challenging' cuts in public services

George Osborne's planned cuts to public services aim to return the nation's finances to surplus by 2018/19. Credit: Oli Scarff/PA Wire

The impact of the Government's planned cuts in public services after the next election will be "hugely challenging", a leading economic thinktank has said, warning against a "false sense that all is now well".

The Institute for Fiscal Studies railed against overconfidence after a return to healthy growth in the economy, saying 60% of Chancellor George Osborne's cuts are still due to take effect from next year.

However, figures from Oxford Economics predicted 2.6% growth in GDP this year, raising the prospect that continued growth could remove the need for Mr Osborne's austerity plans to be implemented in full.

Third of workers wages cut or frozen in 2010-11

Wages have fallen by more in real terms during the current economic downturn than ever previously recorded, according to an economic think-tank.

According to the Institute for Fiscal Studies, a third of workers who stayed in the same post following the recession suffered a cut or freeze in their wages in cash terms in 2010-11.

The research found an "unprecedented" fall in workers' wages Credit: Press Association.

Once inflation is taken into account, real-terms pay has fallen by more since the recession began in 2008 than in any comparable five-year period, said the think-tank in a working paper for the magazine Fiscal Studies.

It found that many UK companies, particularly smaller businesses, have cut wages rather than lay off staff.

Workers have been willing to accept pay reductions because of the fierce competition for those jobs which are available.

IFS: Most working households worse off since 2010

Respected financial analysts the Institute for Fiscal Studies has told ITV News that working households would "substantially" gain from the new welfare benefit changes, but that they would be down overall since the coalition was formed in 2010.

Senior research economist Robert Joyce said: "If you look at just the changes coming in this month and you look at working households then the majority of those will gain and will gain quite substantially.

Institute for Fiscal Studies senior research economist Robert Joyce. Credit: ITV News

"That is mainly because of the rise to the personal allowance, which will reduce the amount of income tax that they pay.

"That stands in quite significant contrast to the wider consolidation.

"Looking at all the measures that are happening that started in 2010 and that are happening to the end of this parliament, if you look at all the measures announced over that period, then most of those families will lose overall because of things like the main rise in VAT back in January 2011."

Chancellor George Osborne earlier said that the welfare and tax changes "will make work pay".

OECD: UK economy may need more stimulus

The OECD said the UK economy may need more stimulus and a further round of quantitative easing may be necessary.

The OECD said UK growth remained flat, and is only expected to "pick up momentum" towards the end of next year. The Paris-based economic think tank forecasts that the UK economy will grow just 0.9% this year, after shrinking 0.1% in 2012.

Angel Gurría, the OECD's secretary general, said a "particularly bright spot" in the UK was employment figures.


OECD: UK needs to boost growth and tackle inequality

The Organisation for Economic Co-operation and Development said the UK must do more to boost growth and tackle inequality, which it says are key to the economic recovery.

Speaking at a press conference with George Osborne, Angel Gurría, the OECD's secretary general again gave the Chancellor broad support:

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.

In its annual report on the state of the economy the OECD said:

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.

Labour: IFS report shows government's failure

Rachel Reeves MP, Labour's Shadow Chief Secretary to the Treasury said the Green Budget, released today by the IFS, shows the government's plan has failed.

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."

IFS: Post-election NHS and pension spending cuts 'likely'

Paul John, director of the Institute for Fiscal Studies, said the effects of further spending cuts on government departments already having their budgets slashed would be "hard to contemplate" and it was more likely that "protected" departments would be hit in the next parliament.

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.

Government 'to borrow £64 billion more' than planned

The Institute for Fiscal Studies said the Chancellor will borrow £64 billion more than intended during this parliament.

The increased figures is due to Osborne's original borrowing predictions being based on a more optimistic economic outlook. The IFS explain:

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.

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