Osborne May Need More Cuts to Achieve U.K. Surplus, IFS Says

  • Tax revenue may be lower than forecast, forcing fresh measures
  • Osborne is boxed in by 'Inflexible' budget-surplus target

U.K. Chancellor of the Exchequer George Osborne may be forced to cut spending further or raise taxes should the fiscal outlook deteriorate if he is to meet his goal of achieving a budget surplus by 2020, the Institute for Fiscal Studies said.

The "inflexible" rules the chancellor has imposed on his management of the economy "could require big tax rises or spending cuts with very little notice," the London-based research group said in its Green Budget published Monday. Reduced earnings growth forecasts are likely to impact tax revenue, while a pre-election pledge to increase tax thresholds remains unfunded.

After his Conservative Party won a majority in last May’s election, Osborne introduced legally binding fiscal rules requiring the government to run an outright surplus every year from 2019–20 “in normal times.” Official data suggest that Osborne is already set to miss his target this year of cutting the deficit to 68.9 billion pounds ($100 billion).

The IFS said that even if Osborne meets all his targets by the March 2019 budget, past errors in official forecasts suggest more than a one-in-four chance that in-year tax increases or spending cuts will be needed to deliver a surplus in 2019–20.

‘Deft’ Management

Osborne has pledged to cut spending and deliver major infrastructure projects such as a new high-speed rail link and "these competing policy priorities certainly need deft financial management," Andrew Ratcliffe, president of the Institute of Chartered Accountants in England and Wales, a contributor to the Green Budget, told a press conference on Monday. "Achieving both of those would indeed be remarkable."

Weaker-than-anticipated earnings growth and volatility in global markets may further impact tax revenue, the IFS said in its report, which sets out the fiscal landscape facing Osborne as he prepares his annual budget on March 16. The declines in equity prices since December’s Spending Review, unless they prove temporary, could cost the government as much as 2 billion pounds in lower capital tax receipts in 2020, the IFS said.

"We are starting from a point this year in the Green Budget which is quite a way below where we expected to be," said Andrew Goodwin, an economist at Oxford Economics and the author of a chapter in the report. While "business sentiment is holding up pretty well," uncertainties, such as the referendum on Britain’s European Union membership that’s expected to be held in June, could yet damp sentiment, he added.

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