The election in 2015 is shaping up to be a desperate scramble for cash to fund public spending after the Institute for Fiscal Studies warned that the next government would need to impose large tax rises or even bigger welfare cuts to protect health and education spending.
Responding to the chancellor's autumn statement, the IFS's director, Paul Johnson, said pushing out the government's austerity programme to 2018 would force the next administration to consider "close to inconceivable cuts" in the Home Office, transport, local government and other "unprotected" areas of government.
He said some departments could face cuts of more than 40% to reach targets set by the chancellor.
"The impact on most areas of spending will depend on decisions on the big two – welfare and the NHS – which between them account for nearly half of all spending. Protect them completely, and protect schools, and every other area of spending will have to fall by 16% in the three years after the next election.
"On top of what has happened in this spending review period that would take cuts in unprotected departments to an average of over 30%. That looks close to inconceivable," he said.
Johnson said adding together the budget cuts covering the eight years of austerity from 2010 to 2018, some departments could be forced to provide services based on a cut of 40% or more in their budgets.
The situation has worsened following forecasts that a £27bn gap in the government's budget has opened up in the two and a half years since the general election.
Hopes that the current austerity plans would be limited to two years into the next government were dashed by the Office for Budget Responsibility, which said in a report to accompany the autumn statement that growth would be 3.6% lower than expected by 2018.
The independent Treasury watchdog, set up by the chancellor two years ago, said lower growth would limit the government's income from tax receipts and force it to borrow more or look for extra savings to continue reducing the annual deficit.
Johnson was presenting the much-respected thinktank's analysis of Osborne's statement to the Commons on Wednesday, which he said was more like a fully fledged budget than the policy review initiated by Gordon Brown.
Osborne told MPs that lower growth over the next five years had forced him to extend the Treasury's austerity programme another year to 2018. A spending review early next year will detail departmental spending through to 2015/16.
Johnson, who is a former civil service economist, said the effect of the Treasury's mini budget was to protect pensioners and people on average earnings who paid the basic rate of tax.
State pension payments were protected from the chancellor's move to limit inflation rises on benefits and tax credits to 1%, rising instead by a minimum 2.5%. Basic rate taxpayers were given a lift after a further £240 rise in the personal allowance to £9,440.
"Broadly the people who are doing a bit better out of [the autumn statement] are pensioners and people in work who are paying basic rate tax," while those at the very top and those living on benefits lost out from the changes.
The below-inflation 1% rise in the threshold for the 40p rate of income tax will drag a further 1 million workers into the higher rate by 2015.
By that point the 40p rate would be paid by more than 5 million people – more than double the level in the 1990s – and would no longer be the preserve of the "highly paid few".
The top 10% of earners pay the most under the government's austerity, the IFS said, though it admitted many of the measures hitting the richest were implemented or devised by the previous Labour government and were continued by the coalition.
Johnson said this pattern of cuts in the autumn statement was consistent with the government's broader set of tax increases and welfare cuts put in place as part of the austerity plan.
"Working-age individuals receiving benefits and tax credits have been hit. The richest few per cent have been hit very hard. Those with children have suffered more than those without. Pensioners and those in work on more modest incomes have borne less of the burden," he said.
But he noted that a £7bn increase – the equivalent of a little more than 1p on the basic rate of income tax – would maintain the 80/20 ratio between tax rises and spending cuts that the chancellor has previously set as his target for his austerity programme.
In a reflection of Conservative thinking on the issue, the party's official Twitter account, @ToryTreasury, said: "80/20 was aim for this parliament and that's what we've got. Beyond that we've chosen further spending cuts not more tax rises."
Osborne came under fire following the statement from critics on left and right, who accused him of complacency in the face of a worsening economic outlook.
The chancellor has pointed to the OBR's view that the economy will grow from next year, albeit more slowly than before. But Labour said his failure to intervene to boost investment and help the economy grow undermined his attempts to cut the deficit.
The rightwing thinktank the Centre for Policy Studies said Osborne had failed to match the radicalism of Margaret Thatcher. It argued for a shorter, sharper shock to the public finances, with steeper cuts to welfare payments and a tougher stance on workless households.
"It is fanciful to believe this can be achieved merely by savings in administration, or freezing certain departmental spending limits while ring-fencing vast swaths of the public sector. What is needed is a fundamental re-examination of the scope of government and of the eligibility for government transfers," it said.
guardian.co.uk © Guardian News and Media Limited 2010
image: © Ivy Dawned