Ministers will be forced to make the most savage spending cuts since the 1970s, a respected economic think tank predicted on Thursday, confounding British Chancellor of the Exchequer Alistair Darling’s attempt to deflect claims that his budget has ushered in a decade of austerity.
The London-based Institute for Fiscal Studies warned that even big spending cuts in health and schools may not be enough to fill the structural deficit in the nation’s finances.
Robert Chote, the institute’s director, said that by 2017 or 2018 the loss through tax increases and cuts in public spending would be equivalent to £2,840 (US$4,150) a year for every family in the country — only half of which has been accounted for by the government.
The institute calculated that there is a £45 billion black hole in the finances, requiring further tax increases of £1,430 per family or massive spending cuts. While it predicted that most of the hole would be filled by cuts, Shadow Chancellor of the Exchequer George Osborne was quick to condemn Labour’s “secret tax bombshell.”
Darling avoided mention of spending cuts in his budget speech, concentrating on a 0.7 percent a year increase in spending from 2011, which excludes investment in key areas such as schools and hospitals. But the institute pointed to the 17 percent annual cuts in investment spending from 2011 to 2012, which will see it halved in three years, and concluded that total spending would fall by 0.1 percent a year over that period.
Once the effect of the 8 percent annual growth in debt interest payments and rising spending on unemployment benefit are stripped out, spending across government departments will have to fall by an average of 2.3 percent a year in real terms, institute economist Gemma Tetlow said. Cuts of this order were last seen in the 70s.
She said that with the government pledged to continue increasing spending on overseas aid, it was likely that all other departments would face spending cuts.
“Health, education, law and order would all experience real cuts,” she said.
Chote said it looked likely that the bulk of the savings required over the coming eight years would mainly come from spending cuts rather than new taxes.
“The main burden of the looming tightening — at least over the next few years — is likely to fall on the users of public services,” he said.
At the same time, British Prime Minister Gordon Brown was fighting off claims that the new 50 percent top rate of income tax imposed on those earning more than £150,000 (US$220,000) marked the death of the New Labour project, the old British Labour party as repackaged by former prime minister Tony Blair and Brown in the 1990s.
Brown and Darling were encouraged by initial poll projections that the new top rate was popular with more than half the electorate.
But a separate poll for the Politics Home Web site showed 53 percent of those polled not believing the chancellor’s economic forecasts that growth would surge back to 1.25 percent next year and 3.5 percent in 2011. Only 9 percent had full faith in the forecast.
Secretary of State for Business Peter Mandelson pleaded with the electorate to judge the government’s budget decisions and the recovery in a year’s time.
In interviews yesterday, Darling conceded public spending was being constrained, but dismissed suggestions that the cuts were of Thatcherite dimensions, arguing that public spending was at a far higher overall level than in the 1980s. New hospitals and schools only had to be built once, he said.
“I believe after a shock to the system such as we have had, we have to ask ourselves about every pound we spend. I know what I have set out will be tough,” he said.
“This secret tax bombshell of £1,430 per family was not even announced by the chancellor on Wednesday. It shows what a dishonest budget it was and how quickly it is unravelling,” Osborne said. “Britain has moved from the age of prosperity to an age of austerity, but the leadership of the Labour party has been completely left behind by events.”
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