Financial News

  • 6 February 2014, 7:21

Economic Recovery: 'End In Sight' For Austerity

Austerity plans put in place by the coalition may already go further than is needed in order to balance the Governent's books, the Institute for Fiscal Studies (IFS) says.

In its closely watched Green Budget, the Government-spending think tank said that even if the most pessimistic forecasters are proved right on the economy, the coalition's fiscal plans will repair the damage done to the public finances by the Great Recession.

The verdict is among the most positive yet delivered by the IFS - although it warned that there remains some uncertainty over whether it will be easy to implement the cuts planned for the coming years, since only 40% of them had been carried out.

IFS Director Paul Johnson said: "Even if the most pessimistic forecasters are right, then the damage done by the recession will be fixed - in terms of the deficit, not the debt."

The forecast marks a watershed moment in the recovery, since the Office for Budget Responsibility (OBR), and the IFS itself, have tended to increase their estimate for the scale of spending cuts needed at almost every Budget and Autumn Statement since 2010.

It is based on the notion that the public finances will improve in the coming years as the economy bounces back.

The IFS said that the impact of the cuts was likely to be greater than broadly appreciated - particularly when population growth was borne in mind.

It said that while overall public service spending was due to fall 1.7% per year between 2010 and 2018 (dropping, eventually, to the lowest level since 1948), the cuts per person amounted to 2.4% a year.

It added that by 2018/19, real age-adjusted health spending per person would be 9% lower than in 2010/11.

Oxford Economics, the consultancy which contributed the economic forecasts to the Green Budget, forecast strong growth in the coming years, with last year's 1.9% GDP growth likely to be revised up and the economy expanding by 2.6% this year.

However it warned that so far the recovery had been "horribly imbalanced."

The IFS said that it did not think that the UK was facing a housing bubble, though it warned that it was more likely in London. It recommended reducing the cap on the Government's Help to Buy scheme from its current 600,000 level.

The Green Budget also pointed out that the Government has become increasingly reliant on the wealthy for the lion's share of tax revenues. It said that the share of income tax contributed by the top 1% of taxpayers has risen from 11% in 1979 to 27.5% in 2011/12.

It added that in 2012/13 Westminster and Kensington & Chelsea alone contributed a full 15% of the UK's entire stamp duty revenue.

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