Osborne Gambles on Surplus After Scaling Back Cuts, IFS Says

  • IFS says chance of meeting surplus goal by 2020 is 50-50
  • Millions will be worse off despite U-turn on tax credits

Chancellor of the Exchequer George Osborne will "need his luck to hold out" if he is to meet his surplus goal by 2020, after scaling back the severity of budget cuts, the Institute for Fiscal Studies said.

In his Spending Review on Wednesday, Osborne reversed a July decision to cut tax credits and refrained from reducing the police budget, announcements that surprised both analysts and the opposition Labour Party. He also pared planned cuts to “unprotected” departments by a third. The decisions were made possible by tax increases and a 27 billion-pound ($41 billion) windfall from changes to forecasts for revenue and debt-interest costs.

"The forecasts will change again, and by a lot more than they have over the past few months," IFS Director Paul Johnson told a briefing in London Thursday. "If he’s unlucky, and that’s almost a 50-50 shot, he will have either to revisit these spending decisions, raise taxes, or abandon” the surplus target.

The Office for Budget Responsibility maintained its forecast for a 10 billion-pound budget surplus in the 2019-20 fiscal year. The requirement to achieve an outright surplus in that year, enshrined into law last month, is now “completely inflexible,” Johnson said.

Worse Off

While his U-turn on tax-credit cuts means Osborne has abandoned his self-imposed cap on elements of welfare spending, it will have little effect on public finances in the long run, Johnson said. The consolidation of several benefits into a single Universal Credit, a plan left untouched by Osborne, will leave around 2.6 million working families 1,600 pounds a year worse off on average, he said. About 1.9 million will be 1,400 pounds better off.

"The policy change ensures that no family will take an immediate cash hit," Johnson said. "But the long-term generosity of the welfare system will be cut just as much as was ever intended as new claimants will receive significantly lower benefits than they would have done before the July changes."

The Treasury rejected the IFS’s claim that Universal Credit will push through the savings that tax-credit cuts were meant to deliver, saying the comparison is “not legitimate.” The two systems are “entirely different” and “the suggestion that tax credit-cuts have somehow been postponed or transferred into Universal Credit is completely misleading,” it said in a statement.

‘Just Wrong’

The IFS said the cost of the tax-credit U-turn is 3.4 billion pounds in 2016-17. When Osborne announced the cut in July, the OBR estimated the saving at 4.4 billion pounds. The original estimate was “just wrong,” Johnson said.

While unprotected government departments will see their day-to-day spending fall by 18 percent rather than the 27 percent implied in July, the spending review is still one of the tightest in post-war history, Johnson said.

“This is not the end of austerity," he said. “Total managed expenditure is due to fall from 40.9 percent of national income in 2014-15 to 36.5 percent in 2019-20. A swathe of departments will see real-terms cuts. The 3 percent cumulative increase in health spending over the next five years is not far off the average annual increase in spending in the last 50 years.”

Before it's here, it's on the Bloomberg Terminal.