Osborne’s pursuit of tax cuts citicised by Institute for Fiscal Studies

Leading independent tax and spending analyst says plans to shrink spending could change public sector beyond recognition.

George Osborne came under fire on Tuesday from a leading thinktank for sanctioning huge tax giveaways that forced the government to impose deeper than expected cuts on vital welfare budgets and Whitehall spending.

The Institute for Fiscal Studies said the coalition government made “remarkable choices” to cut income and corporation tax that shifted the burden of balancing the budget to already hard-hit areas of government spending.

IFS director Paul Johnson said the move had also limited the Treasury’s scope for bringing Britain’s mounting debts under control.

“It’s been very striking over this parliament how £12bn or so is being spent on increasing the personal [income tax] allowance [and] something like £7bn-£8bn on reducing corporation tax,” Johnson told MPs examining Osborne’s autumn statement delivered last week.

“Those are remarkable choices, as it were, in the context of the deficit reduction that you have got, and therefore the spending cuts that you have got. Clearly cutting taxes makes the arithmetic elsewhere more difficult.”

The comments by Britain’s leading independent tax and spending analyst came amid a growing row over the proposals outlined by the chancellor last week to reduce the relative size of the state to a level not seen since 1938.

Osborne told parliament another five years of cuts were needed to departmental spending and local government alongside cuts to the welfare bill to achieve a budget surplus by 2019/20.

MPs later learned that ring-fenced protection of healthcare and schools meant some departments could see their budgets slashed by more than 40% by the end of the next parliament. Local government suffered a 6% budget cut this year but will see this double to 12% in the next financial year under current plans.

Johnson said last week that the deep spending cuts planned by Osborne amounted to a “colossal” reduction in the size of the state and could change Britain’s public sector “beyond all recognition”.

Britain’s budget deficit has failed to come down as quickly as forecast by the Office for Budget Responsibility despite two years during which the UK has ranked alongside the US as the fastest growing of the major developed economies.

Analysis by the National Institute for Economic & Social Research found that the economy grew by 0.7% in the three months to November, which means it is on track to grow by more than 3% this year.

The deficit currently stands at little more than 5% of economic output, down from about 10% when Osborne took office in 2010, but is predicted to fall only slightly this year after a collapse in tax receipts.

Corporation tax receipts have failed to pick up as expected after a cut from 28% to 21% in the past four years. The tax on business profits is forecast to bring in £7bn less this year than was expected four years ago. Next year, the tax is scheduled to fall to 20%, though Labour has promised to reverse the move, using the saving to cut national insurance.

Income tax has suffered a fall during a boom in jobs that has seen Britain’s employment rate reach record levels. Economists have blamed the failure to generate higher tax receipts on a shift to low-paid self-employment and part-time working since the recession.

Osborne last week announced he would miss his most recent short-term deficit-reduction targets, but was committed to restoring a surplus in 2018/19 through spending cuts, without raising taxes, if his Conservative party wins the election.

Johnson’s comments help to lend weight to complaints from political rivals that Osborne’s approach is too heavily focused on spending cuts – particularly in light of a pledge made by Prime minister David Cameron to hand out a further £7bn of tax cuts after the general election.