U.k Facing Tight Budget Due To Damaged Economy
According to new research by IFS, our government need to find 90 billion pounds to balance out their budget.
Britain is facing a huge debt crisis. This would end up costing each British family a huge 2,840 per year by 2017-18 in higher taxes or public spending cuts.
The IFS analysis came after the chancellor submitted his budget which predicted the biggest government debt since the end of the Second World War.
Alistair Darling told the House of Commons that the government would have to borrow 175bn this year as the recession has obliterated the UKs economy.
Shadow chancellor George Osborne said the IFS calculations showed the country was facing a "secret tax bombshell".
Predictions
The drastic cut-backs on outgoings would mimic circumstances seen during the Thatcher years in the mid-1980s, said the IFS.
The independent financial researchers predict overall public spending would drop by 0.1% per year in real terms from 2011 to 2014.
It said if the budget cuts continued to fall on spending up to 2017-18, total public spending would fall back to the level of 2002.
This would eradicate all the spending increases made by the Labour party in its last two terms in office.
"The Treasury's assessment of the fiscal damage wrought by the current economic and financial crisis is breathtaking," said IFS director Robert Chote.
"It will require two full parliaments of mounting austerity to repair."
The IFS said the taxes on the highest earners will not raise much money in comparison with the size of the budget gap. Only 10% of the gap will be raised by new taxes, while 40% will be accounted for by spending cuts up to 2014, it added. The remaining 50% is scheduled for the parliament after next.
Investment and Public Spending
The IFS pointed out the government is planning more than a 50% cut in public investments and reversing its previous approach that aimed to preserve capital investment.
This would mean that funds available for things like new schools, roads, and hospitals would be minimal after 2011.
Furthermore, it pointed out that all of the very modest increase planned in current spending (on pay and running costs) would be taken up with the higher cost of steeper interest rates and paying out more social security benefits.
This meant departmental spending (including areas such as health, education, and policing) would have to decline by 2.3% each year.
If these departments, which make up more than half of all departmental spending, were protected, then there would be even bigger cuts in other departments, of up to 5%.
It was not clear that these can be achieved by "efficiency savings" alone, the IFS said.
And it added that in the following four years, to 2017-8, public spending would also have to grow at just 0.5% annually to meet the budget cut targets without increasing taxes any further.
Output loss
The necessity for large cuts in spending or the raising of taxes does not just come from the severity of the recession.
The IFS said that it was also down to a permanent loss of output by the UK economy as a result of the credit crunch, and added the Treasury had doubled its estimate for the size of that loss.
The loss of output, and therefore of tax revenues, for example from the financial sector, had put a permanent crater in public finances, its report said, meaning the government could not simply count on the demise of the recession to fill the structural gap in the public finances.
And it said that it would be 2032 before government debt returned to the level of 40% of GDP that had been Gordon Brown's target.
Affect on the rich
The IFS also cast doubt on the Treasury's belief that it would raise an extra 7bn per year by taxing the richest citizens, especially those on a salary of over 150,000.
It said there was incredible uncertainty about how much funds the new 50% tax rate would generate, adding that it could raise no money at all if the rich changed their spending habits.
It also warned that if some rich people chose to leave the country and spend less in the UK, that would also lower tax receipts in other areas, such as VAT receipts, even up to as much as 1.5bn.
It was also sceptical about the plan to reduce tax relief on pension contributions, which the Treasury said would raise 3.1bn. This scheme is flawed in its principles, it said, and will be difficult to enforce.
by: sterling green
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