Inflexible Budget Target Risks Tax Rise


February 2016

Inflexible Budget Target Risks Tax Rise

An independent economic think tank has stated that the "inflexible" target that George Osborne has set for the budget surplus means that there is now a greater risk of tax increases.

The IFS (Institute for Fiscal Studies) said that George Osborne will need to carry out a "precarious balancing act" in order to make sure that he will be able to run a budget surplus "in normal times" from 2019-2020.

The Institute now say that it is possible that this will happen but it may require "big tax rises or spending cuts with very little notice" in order to make it a reality. The next budget is due to be delivered on 16 March.

Every year the Institute for Fiscal Studies release an annual "Green Budget" before the release of the official government budget by the chancellor. The Green Budget aims to set out exactly what kind of problems face the treasury in the coming period of time.

The Institute of Fiscal Studies has said that the target of balancing the books by 2020, as set out by the Chancellor George Osborne, is inflexible and could have repercussions for tax and spending in the cases of receiving "unfavourable" fiscal and economic forecasts.

The Institute for Fiscal Studies also pointed out that the United Kingdom has only run a surplus eight times in the previous 60 years.

"The rule has the merit of simplicity and transparency but is very inflexible and this could come at a cost," the IFS said.

"Even if the chancellor gets to the March 2019 Budget with his plans intact, past errors in official forecasts suggest that there would be more than a one-four chance that he would need to implement in-year tax rises or spending cuts to deliver a budget surplus in 2019-20."

Kamal Ahmed, the BBC economics editor, said that George Osborne must convince the public of the fact that they are actually seeing the benefits of the economic growth that he continues to report.

"Mr Osborne knows that he can set as many fiscal mandates as he likes, the public are unlikely to notice.

What they are likely to notice is whether the economic growth they so regularly hear trumpeted by the chancellor is actually making a difference to their lives.

And this is where another part of the Institute for Fiscal Studies' Green Budget comes in.

Yes, the threat of further tax rises and possible public sector cuts might be very real, but the chancellor's political advisors know that one of the key motivators of voting behaviour is whether people feel, and actually are, better off.

And there the figures are pretty gloomy."

However it is unclear how George Osborne will manage to maintain this course of action if the country 's growth begins to falter. He has promised a strategy of tax cuts and also has to keep a cap on government spending. The government has currently promised workers in this country that they will be able to earn more before they start being charged income tax. It is believed that this will come at a cost of more than £8 billion per year but it is as of yet unclear where that money will be coming from.

The Institute for Fiscal Studies went on to say that even if the figures reported on the economy were good, the government would still have to carry out certain measures to be certain that they could reach their target. They would need to continue the growth of fuel duty in line with inflation, they would also need to scrap child benefit for the highest earning families, and they would also need to keep the top-end of tax frozen at £150,000 so that more households would enter the top band as inflation continues.

All of the uncertainty that currently surrounds the UK economy means that it is extremely hard to know which "tough decisions" the chancellor will be forced to take. The director of the Institute of Fiscal Studies, Paul Johnson, said:

"How he responds to any further unpleasant fiscal surprises may, more than anything we have seen so far, come to define his period as chancellor."

The Institute of Fiscal Studies were aided by Oxford Economics in the writing of this report. The body are expecting "relatively disappointing" UK growth in 2016- only 2.2%. However they also said that the high level of consumer spending has seen a "sugar rush" because of the low level of inflation being brought about by low oil prices. It said that it thought that this was likely to continue. The climate for investment by businesses still remains "favourable".

The latest Inflation Report from the Bank of England said that they have now lowered their predictions for growth from 2.5% to just 2.2%.

In a recent speech to business leaders at the Davos World Economic Forum, George Osborne said that the economic outlook for the UK remained strong.

"We 've got the highest employment rate in our history. Real wages are growing.

The deficit as a share of GDP is down to nearly a third of what it was with solid public finance data this morning. On the back of this, business investment is forecast to grow at 7.4% this year ñ the fastest growth since before the crisis.

That shows your confidence in the UK economy. I 'm proud of these economic achievements."

He went on to say that he is as committed now to running a surplus as he ever has been and that it is still the right thing to do. Following last summer 's budget, many people he says were calling for a return to borrowing but he remains confident that this is the right course of action to take.

"When we came to office in 2010 the deficit was over 10% of GDP. £1 in every £4 the country spent had to be borrowed. We 've dramatically reduced that deficit ñ but it remains too high. So does our debt. The Budget last summer and the Spending Review that followed took further difficult decisions so that we turn that deficit into a surplus."

"I said at the time that we needed that surplus as the precaution against tough times ahead. People said it wasn 't necessary, we should run a deficit forever. I think events at the start of this new year have borne out our judgement. They serve as a salutary reminder that we need to do everything we can to fix our public finances and build our resistance for whatever lies ahead."

"Reducing government spending is easy to talk about; but hard to deliver. Every government budget has its pressure groups who will go on our TV and radio to defend every pound we spend. But we have persevered in the patient work of saving money and reducing borrowing."