Alistair Darling accused of 'tax bombshell' as thinktank warns of massive cash gap
Ministers will be forced to make the most savage spending cuts since the 1970s, a respected economic thinktank predicted yesterday, confounding Alistair Darling's attempt to deflect claims that his budget has ushered in a decade of austerity.
The Institute for Fiscal Studies warned that even big spending cuts in health and schools may not be enough to fill the structural deficit in the nation's finances.
Robert Chote, the institute's director, said that by 2017-18 the loss through tax increases and cuts in public spending would be equivalent to £2,840 a year for every family in the country - only half of which has been accounted for by the government.
The IFS calculated that there is a £45bn black hole in the finances, requiring a further tax rises of £1,430 per family, or massive spending cuts. While it predicted that most of the hole would be filled by cuts, the shadow chancellor, George Osborne, was quick to condemn Labour's "secret tax bombshell".
The chancellor avoided mention of spending cuts in his budget speech, concentrating on a 0.7% a year increase in spending from 2011, which excludes investment in key areas such as schools and hospitals. But the IFS pointed to the 17% annual cuts in investment spending from 2011-12 which will see it halve in three years, concluding that this will mean total spending will fall by 0.1% a year over that period.
Once the effect of the 8% annual growth in debt interest payments and rising spending on unemployment benefit are stripped out, spending across government departments will have to fall by an average of 2.3% a year in real terms, said IFS economist Gemma Tetlow. Cuts of this order were last seen in the 70s.
She added that with the government pledged to continue increasing spending on overseas aid, it was likely that all other departments would face spending cuts. "Health, education, law and order would all experience real cuts."
Chote said it looked likely that the bulk of the savings required over the coming eight years would mainly come from spending cuts rather than new taxes.
"The main burden of the looming tightening - at least over the next few years - is likely to fall on the users of public services," he said.
At the same time, Gordon Brown was fighting off claims that the new 50% top rate of income tax imposed on those earning more than £150,000 marked the death of the New Labour project.
Brown and Darling were encouraged by initial poll projections that the new top rate was popular with more than half the electorate.
But a separate poll for the Politics Home website showed 53% of those polled not believing the chancellor's economic forecasts that growth will surge back to 1.25% next year and 3.5% in 2011. Only 9% had full faith in the forecast.
Lord Mandelson, the business secretary, pleaded with the electorate to judge the government's budget decisions and the recovery in a year's time.
In interviews yesterday, Darling conceded public spending was being constrained, but dismissed suggestions that the cuts were of a Thatcherite dimensions, arguing that public spending was at a far higher overall level than in the 1980s. New hospitals and schools only had to be built once, he said. "I believe after a shock to the system such as we have had, we have to ask ourselves about every pound we spend. I know what I have set out will be tough."
But he refused to say how departmental budgets will be cut after 2011.
Osborne said: "This secret tax bombshell of £1,430 per family was not even announced by the chancellor on Wednesday. It shows what a dishonest budget it was and how quickly it is unravelling.
"Britain has moved from the age of prosperity to an age of austerity, but the leadership of the Labour party has been completely left behind by events.
"The most cynical trick of all for the government is to pretend that they are only hitting the rich by raising their taxes before the election, while delaying the real tax rises and tough spending decisions until after the election."
He refused to promise to abolish the 50p rate, even though Boris Johnson, the mayor of London, called for its repeal and urged the Tories to concentrate on tackling the "colossal waste" in Whitehall. Brown denied that the 50% tax rate represented the end of the politics of aspiration. "There has got to be a contribution by those who have the most, and who have gained the most over the last few years," he said.
"This is not taxation for its own sake, it is tax for a purpose. This is Britain fighting back against the international recession, this is Britain taking bold action for recovery."
Although the introduction of the 50% rate breached a key New Labour manifesto commitment, Brown insisted: "What we are about is aspiration, we are about helping people get on, we are about giving people new chances, we are about helping people make the most of their potential. New Labour, that's what we're about."
Darling described the 50p as necessary "while we resolve this situation".
