UK chancellor George Osborne may be forced into raising taxes or imposing further austerity “with very little notice” if he is to meet his “inflexible” target to run a surplus every year from 2019-20 in “normal times”, the Institute for Fiscal Studies has warned.

The well-respected think tank says Mr Osborne may well find himself “boxed in” by his own fiscal charter if economic and fiscal targets set out in his most recent spending review, in November, turn out to be too optimistic. Mr Osborne is due to present his budget on March 16.

The Chancellor in November maintained his forecast that the UK would run a budget surplus of £10bn by the end of the decade but a number of forecasters – including Moody’s - have warned that he doesn’t have much room for manoeuvre if the economy takes an expected turn for the worse or tax revenues fall short of forecasts.

The IFS points out that the UK has managed to run a budget surplus only eight times in the last 60 years. In what it calls its “Green Budget”, the London-based think tank warns that it could take until the mid-2030s for debt as a share of national income to fall back to levels seen before the financial crisis of 2008-2009.

The IFS says Mr Osborne’s fiscal charter, which was passed by Parliament last year and created discord among opposition Labour MPs, has the “merit of simplicity and transparency”, but it is also very inflexible and “this could come at a cost”. The think tank says:

It could require big tax rises or spending cuts with very little notice in order to ensure it is met. Even if the Chancellor gets to the March 2019 Budget with his plans intact, past errors in official forecasts suggest that there would be more than a one-in-four chance that he would need to implement in-year tax rises or spending cuts to deliver a budget surplus in 2019–20.

In order to meet his £10bn surplus target by 2015 – which is equivalent to 0.5 per cent of national income – the chancellor is banking on a jump in income from tax revenues. But the IFS cautions:

tax revenues are volatile and uncertain. Last week’s Bank of England inflation report downgraded forecast average earnings by more than 1 per cent just since November. If average earnings do rise 1 per cent less by 2019–20 than the November forecast, he [the Chancellor] could expect to lose £5 billion of income tax and National Insurance revenues. The fall in equity prices seen just since the Spending Review could, unless it proves purely temporary, cost the government £2 billion in lower capital tax receipts in 2020.

Paul Johnson, director of the Institute for Fiscal Studies added:

Mr Osborne’s new fiscal charter is much more constraining than his previous fiscal rules. Uncertainty in the fiscal forecasts means that he may well have to cut spending further or raise taxes to get to surplus in 2019–20. 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. How he responds to any further unpleasant fiscal surprises may, more than anything we have seen so far, come to define his period as Chancellor.

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