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Osborne warned his slow economic growth could mean another SIX years of cuts and VAT rising to 25%
Institute for Fiscal Studies delivers alarming assessment of the Chancellor's economic planMore pain to come after growth proved more sluggish than predictedAusterity may have to last until 2018 or impose an extra 23billion of cuts by 2015-16Mr Osborne urged to ditch target for debt to be falling by 2015
17:54 GMT, 26 November 2012
Warning: Chancellor of the Exchequer George Osborne has been told he could face having to increase tax and impose more cuts to meet pledges to cut the deficit
The era of austerity could last until 2018 and VAT may have to rise to as high as 25 per cent to help plug the hole in the public finances, the Chancellor was warned last night.
Economists said that if George Osborne wants to meet his pledge to cut the deficit, he could be forced to announce dramatic tax increases, or impose further cuts.
The influential Institute for Fiscal Studies said the continued sluggishness of the economy means the current squeeze on public spending may have to last until 2018.
And it said the Chancellor will be forced to announce even more bad news for taxpayers if he is to meet his debt and deficit targets.
Under an even more pessimistic scenario, he would be forced to raise an extra 23billion by 2015/16, which he would have to fund by either imposing further cuts or putting up taxes.
If he decides to put up taxes, the amount needed would be the equivalent of putting up VAT from the current 20 per cent to 25 per cent, the report says.
The grim prospects are contained in new assessment by the IFS ahead of Mr Osborne’s Autumn statement on December 5.
It concludes that if the economy fails to grow as projected, then the squeeze on public spending would have to be extended and will have lasted for an unprecedented eight years.
Carl Emmerson, deputy director of the IFS, said: ‘Since the budget the outlook for the UK economy has deteriorated and government receipts [taxes] have disappointed by even more than this year’s weak growth would normally suggest.
‘In that case the planned era of austerity could run for eight years, from 2010-11 to 2017-2018.’
The IFS’s predictions will not make happy reading for ministers hoping that the return of Britain to growth in the third quarter of this year would kickstart the Conservatives into office at the end of the current parliament.
Even if the economy does improve the
Chancellor may be forced to announce that he has to abandon a crucial
fiscal target – one of the keystones of the Coalition policy.
Osborne promised the country that by the time this parliament is over in 2015/16 the overall levels of debt – the accumulation of years of borrowing – would be on a downward path.
It now looks as if that may be impossible in the face of falling tax receipts and rising welfare payments.
The IFS estimates that if current trends continue, borrowing in the current financial year will hit 133billion – 13billion higher than forecast by the Office for Budget Responsibility for the March budget.
Carl Emmerson, deputy director of the IFS, says austerity measures could run for eight years in total taking it to 2018
The IFS does offer the Chancellor a glimmer of hope. It says that under an ‘optimistic’ scenario no further cuts would be required to meet his budget goals.
But even in this case he would need to press ahead with a further 8billion of cuts in the welfare budget, before the end of this Parliament, to keep the public finances on an even keel.
Much will depend on the state of the economy. After a run of bad surveys there are concerns that the growth may have slipped back into negative territory in the final months of this year after the one per cent bounce in the three months to the end of September.
The IFS says that debt is on course to rise as a share of the nation’s total output. This would almost certainly mean that his promise to start bringing debt down as a proportion of UK output by 2016 would be missed.
Forecasts by the International Monetary Fund show that debt will be still be rising beyond the current parliament, reaching 96 per cent of gross domestic product in 2016
Defence giant BAE has confirmed it is thinking of closing one of its three major shipyards in a move that could threaten more than 1,000 jobs.
It is believed Portsmouth is most at risk. BAE, which launched a review of its maritime operations earlier this year, has two yards in Glasgow, at Govan and Scotstoun. A decision is expected by the end of the year.