George Osborne’s latest tax cuts for the wealthy will leave him with a Herculean task of reducing borrowing by £32bn to meet his budget surplus rule in 2019-20, according to the Resolution Foundation.
A string of giveaways in the next couple of years will increase government borrowing above his previous forecasts and force him to find £32bn of tax rises and spending cuts in the last year of the parliament.
The thinktank said the decision to offer tax cuts to wealthier groups in the form of higher tax thresholds and lower capital gains tax was “misguided” when official forecasts showed there was a £56bn gap in the government’s finances.
“By increasing spending through expensive and poorly targeted tax cuts, the chancellor has created a Herculean task of reducing borrowing by £32bn in a pre-election year. It is hard to see a government seeking to build a pre-election feelgood factor delivering a consolidation comparable to that seen during the chancellor’s first two years in office.
“We think it is misguided to be giving away money on increases in higher thresholds for the personal allowance and 40p rate, which we estimate will cost around £2bn,” said the Resolution Foundation chief economist, Matthew Whittaker.
The thinktank’s analysis of the tax and benefit changes for the rest of the parliament shows that by 2020 the poorest fifth of households will lose an average of £550, while the richest fifth will gain an average £250.
Anti poverty campaigners have attacked the chancellor for favouring wealthier groups in his budget and ignoring households that earn too little to pay tax.
Whittaker said the budget was “highly regressive” following the tax changes, and was made worse by extra cuts to benefits, especially on disabled people scheduled for the last two years of the parliament.
The Office for Budget Responsibility said the main reason for a deterioration in the government’s finances came from slower growth and lower productivity.
Whittaker said lower productivity meant median wages would rise on average by little more than 1% over the next few years in a “new normal” of lower than previously forecast earnings rises.
He said typical pay will not get back to its pre-crisis peak until 2021 based on consumer prices index inflation increases. If the unofficial inflation measure RPIJ is used, which includes some housing costs, typical wages will remain well below the 2008 level until well into the next decade.
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