George Osborne was drawn into a confrontation with Britain’s leading tax and spending experts after the Institute for Fiscal Studies said he had a duty to spell out his deficit reduction plans and warned of cuts on a “colossal” scale.
The public sector spending cuts over the next five years set out in the autumn statement might force a “fundamental re-imagining of the state”, the IFS said.
The warning from Britain’s leading public spending analysts came hours after Osborne had angrily rounded on the BBC, accusing its reporters of “totally hyperbolic” reporting about his spending plans and conjuring up bogus images of the 1930s depression.
But within hours of his rebuke, the IFS confirmed that the scale of cuts to departmental budgets and local government would reduce the role of the state to a point where it would have “changed beyond recognition”. The government’s spending watchdog, the Office for Budget Responsibility (OBR), had itself said on the day of Osborne’s statement that the cuts set out in Treasury assumptions would see the state reduced to its smallest size relative to GDP for 80 years.
A rattled chancellor objected to references to Orwell’s The Road to Wigan Pier in BBC reports. He said: “I would have thought the BBC would have learned from the last four years that its totally hyperbolic coverage of spending cuts has not been matched by what has actually happened. I had all that when I was interviewed four years ago and has the world fallen in? No it has not.”
The IFS director, Paul Johnson, said: “The chancellor is right to point out that it has proved possible to implement substantial cuts over this parliament. One cannot just look at the scale of implied cuts going forward and say they are unachievable. But it is surely incumbent upon anyone set on taking the size of the state to its smallest in many generations to tell us what that means.
“How will these cuts be implemented? What will local government, the defence force, the transport system, look like in this world? Is this a fundamental reimagining of the role of the state?”
The IFS also contradicted government claims that the bulk of the cuts had been implemented, saying only £35bn of cuts had already happened, with £55bn yet to come. The coalition uses a different period and focuses on cuts already announced, as opposed to implemented.
In a report that came with a health warning over many of the government’s spending forecasts for the next five years, the IFS said many government departments could suffer budget reductions amounting to more than 40%.
They are expected to have suffered an average 9.5% cut in real terms by 2015/16 after the schools budget, the NHS and international aid increased by 6.5% and other departments took a 20% cut.
The IFS estimates that 10 years of cuts from 2010 to 2020 will leave schools, the NHS and international aid 6.5% better off, but other departments 41% down in order to achieve an average 22.2% overall reduction in spending.
Osborne said: “I’m not pretending these are easy decisions or that they have no impact. But the alternative of a return to economic chaos, of not getting on top of your debts, of people looking at Britain across the world and thinking that is not a country in charge of its own destiny, is not a world that I want to deliver.”
Tory Treasury sources disputed the IFS £55bn figure, saying it included cuts in 2015-16 that had already been announced and legislated for. It also ignored £12bn of planned welfare cuts and £5bn targeted savings from a clampdown on tax avoidance as well as further pay restraint.
Vince Cable, the Lib Dem business secretary, has asked to meet the OBR to discuss whether it can inform MPs of the options facing the political parties on tax, spending and the deficit before the Commons votes on a charter of budget responsibility being prepared by the coalition.
Osborne has said he wants an updated charter, or compact, setting out quickly the deficit will be erased laid before the Commons in a motion next week and voted upon in the new year.
Cable wrote to the OBR a fortnight ago asking them to to do more to distinguish between the agreed coalition plans up to 2015-16, and the period thereafter which is based on spending assumptions. He argues it would be possible for the OBR to sketch the different options in terms of spending, taxes and fiscal consolidation after 2015-16 without drawing the OBR into costing party programmes, something the OBS is debarred from doing by statute.
Cable told LBC he was partly motivated by a desire to give MPs information before the vote on the charter. He said : “What I think we are going to have to do now, as we approach this issue about the vote in parliament in a few weeks time on the so called fiscal compact, is to decide what the balance of tax, spend and welfare is, and in order to do that we need to have different scenarios and it would be very helpful if the OBR, a political impartial body, were to say what the consequences were of different mixes, different options and then we have got the evidence to have an informed debate and for the public to understand where the parties are coming from.”
Cable said: “I think the plans that Osborne set out are actually implausible. I don’t think they can be realised. Whatever government comes in, even a Conservative government, is going to have to increase taxes, for example.”
A report showing British workers have suffered the biggest fall in real wages of all major G20 countries since 2010 put further pressure on Osborne. The International Labour Organisation said the UK’s workers had fared worse in terms of falling real pay than the bailed-out eurozone economies of Portugal, Spain and Ireland.
Patrick Belser, senior ILO economist and author of the report, said: “In the UK in 2008 there was some positive growth of real wages whereas some other countries had stagnant or declining wages – such as Japan. What you see subsequently is a continuous fall in wages to 2013. We expect wages to be at best flat this year, and they will most likely decline.”
The report chimes with data showing most jobs created in recent years are self employed or part-time and on lower pay than in previous years. One of the biggest blows to Osborne’s budget plans was a £27bn forecast fall in tax receipts by 2019.
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