UK 'could face austerity until 2018'

The think tank's analysis takes account of a weaker outlook for the economy

The chancellor may have to extend the squeeze on public spending until 2018 if the recent deterioration in growth prospects and tax receipts turns out to be permanent, a think tank has said.

The Institute for Fiscal Studies said George Osborne may have to find another £11bn from tax rises or spending cuts if the economy does not pick up.

This is on top of £8bn of cuts already mooted in the Budget.

Mr Osborne will deliver his Autumn Statement on 5 December.

The IFS warned that the statement could bring "more fiscal pain".

A spokesperson for the Treasury said that the independent Office of Budget Responsibility (OBR) would make its economic forecast next week alongside the Autumn Statement.

Two scenarios

The think tank's latest analysis takes account of "the now weaker outlook for the UK economy" and "the disappointing trend in tax revenues seen over the last seven months".

Figures last week showed the government borrowed more than expected in October with a fall in corporation tax receipts contributing to the rise.

The IFS said if borrowing continued at the same pace for the rest of the year, the government would miss its borrowing target by £13bn.

It sets out two scenarios for the economy:

• a relatively optimistic scenario, in which the increase in borrowing and the deterioration in growth prospects turn out to be temporary

• a relatively pessimistic scenario, in which the undershoot in tax receipts and the deterioration in growth prospects turn out to be permanent

It said that under the first scenario, "no further action above that already planned" would be needed for the chancellor to meet his fiscal mandate of balancing the budget by the end of a rolling five-year period, though he has already discussed the possibility of welfare cuts of £8bn over the two years from 2015-16 to 2016-17.

But under the second scenario, to meet that mandate would require extending the squeeze on public spending to 2017-18 and implementing a further £11bn of tax increases or welfare cuts, on top of the £8bn.

The Treasury spokesperson said: "Action taken by the government has cut the deficit by a quarter, whilst over a million new jobs have been created in the private sector, inflation is down, and the economy is healing.

"Britain still faces economic challenges at home and abroad but the government is taking the tough decisions needed to deal with our debts and equip our economy for the global race.

Worsening outlook

The IFS also said that Mr Osborne may have to abandon his other fiscal target - that debt should be falling as a share of GDP in 2015-16.

However, the governor of the Bank of England, Sir Mervyn King, has said that missing the debt target would be acceptable "if it's because the world economy has grown slowly and so we, in turn, have grown slowly".

Economists at Goldman Sachs have also suggested that missing the debt target would not necessarily result in the UK losing credibility or its AAA sovereign rating.

Carl Emmerson, deputy director of the IFS, said: "Since the Budget, the outlook for the UK economy has deteriorated and government receipts have disappointed by even more than this year's weak growth would normally suggest.

"As a result, the chancellor might find himself having to abandon one of his fiscal targets.

"If much of the additional weakness this year feeds into a permanently higher outlook for borrowing, then in order to comply with his other fiscal target Mr Osborne would need to announce yet more tax rises or spending cuts for the next parliament in next week's Autumn Statement.

"In that case the planned era of austerity could run for eight years - from 2010-11 to 2017-18."

He told the BBC: "If we do have a permanently worse outlook for borrowing, it would be sensible to announce now, measures for future implementation - not more pain now but more pain in future years to get that deficit down."

'Change course'

Chris Leslie, Labour's shadow Treasury minister, said Mr Osborne should use his Autumn Statement next week to "finally set out a plan to create the jobs and growth which are vital to get the deficit down".

"He must rethink his plan to give millionaires a tax cut next year while forcing millions of families and pensioners to pay more. People on low and middle incomes should not be paying the price for this government's economic failure."

TUC general secretary Brendan Barber said the IFS's analysis showed that the chancellor's economic strategy was "failing on all counts" and that he should "change course".

"Sadly (Mr Osborne) looks set to drive the economy even faster in the wrong direction," he said.