Osborne May Extend U.K. Austerity to 2018, IFS Says

Chancellor of the Exchequer George Osborne may have to extend his austerity program by another year to 2018 after a deterioration in Britain’s economic prospects, according to the Institute for Fiscal Studies.

In an analysis published today, the London-based research group said Osborne is on course to miss his target of seeing the burden of government debt falling by 2015, and further tax increases and spending cuts may be needed to erase the structural deficit in five years, the mainstay of his economic strategy. It means the total squeeze may last eight years.

The report heaps further pressure on Osborne as he prepares to deliver his autumn statement to Parliament on Dec. 5. The announcement will be based on the assessment of his independent fiscal watchdog, the Office for Budget Responsibility, which is expected to lower its economic growth forecasts.

“The outlook for the U.K. economy has deteriorated and government receipts have disappointed by even more than this year’s weak growth would normally suggest,” said IFS Deputy Director Carl Emmerson.

Osborne may face another hole in the public finances, requiring a further 11 billion pounds ($18 billion) of welfare cuts or tax increases on the top of the 8 billion pounds of welfare reductions already under discussion, according to the IFS. Osborne had originally planned for the cuts to end by the time of the 2015 general election.

Abandon Target

Even under an “optimistic” outlook, debt will continue to rise as a share of GDP in 2015-16 instead of falling, the IFS said. It called on Osborne to abandon his target rather than tighten policy to meet it, saying it had little “to commend it in terms of the economics of managing the public finances.”

Net debt climbed to 1.07 trillion pounds last month, or 67.9 percent of GDP, according to the Office for National Statistics.

The research group also said the fiscal targets should exclude the transfer of billions of pounds of cash held by the Bank of England under its bond-buying program “to avoid any possible perception” that the move announced earlier this month is intended to help Osborne meet his budget goals.

The IFS said the budget deficit in the fiscal year through March 2013 may reach 133 billion pounds, 13 billion pounds more than the OBR prediction in March.

Independent forecasts published by the Treasury last week showed the economy contracting 0.2 percent this year before expanding 1.1 percent in 2013 and 1.7 percent in 2014. In March, the OBR predicted growth of 0.8 percent, 2 percent and 2.7 percent, respectively.

To contact the reporter on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net