It will be February 2032 before Britain’s debt burden falls back to the level that would have been required to meet Gordon Brown’s once-cherished “golden rule”, according to an analysis of Wednesday’s Budget by the Institute for Fiscal Studies.
Britain faces “two parliaments of pain” in which borrowing will be so substantial that it will be more than 20 years before debt falls back to the 40 per cent of national income that the prime minister identified as the maximum acceptable during his tenure as chancellor.
“The fiscal damage wrought by the current economic and financial crisis is breathtaking,” said Robert Chote, IFS director. As a result, Britain would see its highest level of borrowing since the second world war.
The institute also suggested Britain’s potential productive output had been permanently lowered by the crisis. “The Treasury forecasts now imply that the crisis has dealt a permanent hit to the exchequer costing around 6.5 per cent of national income, or £90bn ($132bn) in today’s money,” he said. As a result, the nation’s output will be permanently about 5 per cent lower in the future than had been believed at the time of the 2008 Budget.
The brunt of the pain under the Treasury plans will not initially be manifest in tax increases because the government appears prepared to cut spending and borrow to plug the gap. By 2017-18 the fiscal impact of the crisis will have cost each UK family about £2,840, mostly through lost public services but also through tax increases, the IFS says.
It calculates the planned tax increases spelled out in the Budget and last November’s pre-Budget report amount to 0.7 per cent of gross domestic product, or a total of about £300 per family by 2017-18. Spending cuts will cost families more – these will be equal to 1.5 per cent of GDP, or nearly £690 per family. Investment will be cut by 1 per cent of GDP, or £425 per family.
However, projected tax receipts will not cover government spending, so there will need to be tax rises or spending cuts equal to 3.2 per cent of GDP during the parliament after next, or a further £1,430 per family, the IFS calculates. About half of the necessary reductions in expenditure remain unidentified, it says.
The Conservatives seized on the IFS conclusions. George Osborne, shadow chancellor, said: “It shows what a dishonest Budget it was and how quickly it is unravelling.”
The IFS added there was a risk the government’s proposed car scrappage scheme, under which those who junk a car more than 10 years old for a new one can qualify for a rebate, may prove more popular than government estimates.
Andrew Leicester, economist at IFS, said that there were 300,000 subsidies available but up to 10m or so eligible vehicles. He said research from other countries showed the rate at which old cars were turned in was much higher than the 3 per cent for which the government had allowed.
The IFS also questioned whether the government could raise the revenue forecast from tax changes outlined last November and expanded on in the Budget.
In particular, the effort to raise £2.4bn from people earning £150,000 a year or more by raising the top rate of tax to 50 per cent does not take into account changes in consumption due to higher taxes or possible avoidance.
Stuart Adam, research economist at IFS, said the loss of indirect tax revenues, such as VAT, could be as much as £1.5bn as the rich cut back on purchases. “This reform could actually cost money,” he said.
Although the Inland Revenue made some adjustments, these are not nearly as great as those suggested in some academic studies, he said.
Mr Adam said planned cuts to pension tax relief for those earning above £150,000 – culminating in tax relief at only the basic rate for those earning annual salaries of £180,000 – would be difficult to carry out. That is because the Treasury proposal would change the entire basis for assessing the value of an annual pension contribution.
Get alerts on UK politics & policy when a new story is published