Next U.K. Government Faces Tough Decisions on Cuts, IFS Says

Britain’s next government faces “painful decisions” about the scope of cuts needed to reduce the budget deficit, the Institute for Fiscal Studies said.

Plans set out by Chancellor of the Exchequer George Osborne in the Autumn Statement could mean public spending falling to its lowest share of national income since at least 1948 and fewer people working in the public sector than at any time since at least 1971, the IFS said in its Green Budget published Tuesday. Lower-than-forecast inflation has led to smaller spending cuts than envisaged in 2010, the IFS said.

“Real spending cuts have been substantially less than originally planned, no net additional tax rises have been implemented, and tax revenues have proved less responsive to the economic growth we have had than was expected,” the IFS said. “Difficult choices lie ahead.”

Three months before the election that remains too close to call, the deficit remains a key battleground between Prime Minister David Cameron’s Tories and Ed Miliband’s Labour opposition. While the Tories say a vote for Labour will mean economic “chaos,” Miliband says his party will implement spending cuts fairly.

Current fiscal plans suggest cuts of only 9.5 percent by the end of next year, compared with the 10.6 percent initially proposed, the IFS said. Capital spending by departments has been cut in real terms by only about half as much as originally planned.

Electoral promises will also make it more difficult to balance the books. Protecting real spending on health, schools and overseas aid doubles the average cut for all other departments, the IFS said.

Party Proposals

Labour’s fiscal target -- to eliminate borrowing except for investment -- means “substantially” smaller spending cuts than implied by the Conservative pledge to return the overall budget to surplus, the IFS said. Under Labour plans, debt would fall by 9 percentage ponts of gross domestic product if the target is maintained after 2020, compared with a 19 percent fall under the Conservative goals.

Either way, Britons may still face years of austerity. The IFS suggests the U.K. is currently planning the largest fiscal consolidation out of 32 advanced economies from 2015 to 2019, based on International Monetary Fund forecasts.

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