Emergency budget must find £85bn in tax and cuts, warns IFS

Chancellor George Osborne may be able to reach his targets for deficit reduction without announcing any new tax rises in next week's budget, according to research from the Institute of Fiscal Studies (IFS).

However, it has warned that such a move would cause cuts to welfare and departments that would seem 'prohibitively large'.

The IFS said that as Osborne is seeking to meet his plans some 80% through spending cuts and 20% through tax rises those plans already announced under the previous Labour government could meet the tax element.

The IFS calculations suggest that Osborne needs to save or raise some £85 billion by 2015-15. This means under his ratio of spending to tax he would need to find £17 billion of new tax revenues. However, the IFS believes Labour has already announced moves amounting to some £18 billion.

IFS director Richard Chote said: 'We estimate that based on Treasury figures, the tax rises put in place by Labour would increase tax revenues by £18 billion. This suggests that the 4:1 ratio of spending cuts to tax rises, with 'a significantly accelerated reduction in the structural deficit over the course of a parliament', could be brought about without any further net increase in tax.'

However, Chote added that in order for this to be the case no further tax cuts would have to be agreed. This would torpedo the initial agreement by the coalition to raise the income tax threshold towards £10,000 in line with the Liberal Democrat manifesto.

However, Osborne may feel he has wriggle room to re-negotiate this promise because new calculations suggest the capital gains tax rise that had been planned to pay for it may not raise as much as originally though. The plan on capital gains has come under concerted attack in recent weeks leading to admissions that there will be significant concessions to bring down its impact on buy-to-let investors

The IFS has also focused on the cost to the coalition of holding to its commitment on year on year increases in spending on the NHS. It points out that even if NHS spending increased by just 0.1% a year this would increase the cuts needed throughout other departments to a full 9.4%. It argues this may be deemed 'prohibitively large.'

In order to get around this cuts to welfare spending would be on the cards. However to stick to the current planned cuts to departments and raise NHS spending by just those ten basis points benefits would need to be cut by £30 billion, equivalent to 18% of all benefits over five years.

Chote concludes: 'This suggests that next week's budget may contain some combination of an additional squeeze on [departments], cuts in welfare payments and net tax increases so as to spread the pain.'

Obsorne will need to find savings of £39.3 billion a year to hit the target for public spending cuts over the next five years.

This amounts too the need to find 2.7% a year, a cumulative cut of 10.2% over five years, from the budgets of Whitehall departments.