UK’s “Era Of Austerity” Could Last Until 2018, Warns Think-Tank

UK Chancellor of the Exchequer George Osborne may have little choice but to announce further spending cuts and tax rises during next week’s national budget statement, warned a leading economic think-tank on Sunday, as the nation’s net debt continues to climb amid weak economic forecasts.

UK Chancellor of the Exchequer George Osborne may have little choice but to announce further spending cuts and tax rises during next week’s national budget statement, warned a leading economic think-tank on Sunday, as the nation’s net debt continues to climb amid weak economic forecasts.

Osborne, who will deliver his Autumn Statement on December 5, had previously discussed the possibility of welfare cuts of up to 8 billion pounds ($12.8 billion); but the Institute for Fiscal Studies (IFS), a London-based research group, now claim that another 11 billion pounds, on the top of the 8 billion, had to be found if the U.K. was to reduce its government debt burden, which presently stands at 67.9 percent of GDP.

“Since the last budget [in March], the outlook for the UK economy has deteriorated and government receipts have disappointed by even more than this year’s weak growth would normally suggest,” said IFS deputy director Carl Emmerson, as cited by The Independent.

“As a result, the Chancellor might find himself having to abandon one of his fiscal targets. If much of the additional weakness this year feeds into a permanently higher outlook for borrowing, then in order to comply with his other fiscal target Mr Osborne would need to announce yet more tax rises or spending cuts for the next parliament in next week’s Autumn Statement.

[quote]“In that case the planned era of austerity could run for eight years – from 2010/11 to 2017/18,” Emmerson warned.[/quote]

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Although the IFS admitted that this scenario was based on a relatively pessimistic outlook, it nevertheless believed that the national debt would continue to rise as a share of GDP in 2015-16 – even if increase in borrowing and the deterioration in growth prospects turned out to be only temporary.

The report comes as a blow to the Conservative government who had promised to eliminate its budget deficit by 2015 (which also happens to be an election year) and to get Britain’s public sector net debt falling as a percentage of national output by 2015/16. The IFS recommended that Osborne abandon these targets, rather than try to tighten policy in order to meet them.

[quote]”The Chancellor would likely be best advised to abandon the rule and consult on replacing it with something that better ensures long-run sustainability rather than engage in significant further fiscal tightening in order to remain on course to comply with this target,” it said.[/quote]

Last week, independent forecasts published by the Treasury predicted that the U.K. economy would contract by 0.2 percent this year before expanding 1.1 percent in 2013 and 1.7 percent in 2014. In March, the Office for Budget Responsibility had forecasted growth of 0.8 percent, 2 percent and 2.7 percent, respectively, but they are likely to lower their predictions during next week’s Autumn Statement.

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