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Alistair Darling faces £39bn hole in public finances

Guardian Economics 7th April 2009
  • IFS predicts big tax rises and drastic spending cuts
  • Clamour from unions for action to take on recession

Alistair Darling's room for manoeuvre at the budget in a fortnight's time is severely limited, according to a study by the independent Institute for Fiscal Studies, which shows public debt surging to 80% of GDP - double Gordon Brown's "sustainable" ceiling.

With unemployment above two million and rising, the Treasury is receiving a chorus of demands for urgent recession-busting measures, including calls yesterday for a £25bn fiscal stimulus from the TUC; but the IFS's calculations reveal the tough arithmetic facing the chancellor if he wants to spend more.

Collapsing tax revenue from the recession-hit City and housing market have helped to blow a £39bn hole in public finances, which will have to be filled through big tax increases or drastic spending cuts, says the IFS's latest assessment.

Raising that sum through taxes alone would impose a £1,250 increase on every family in Britain. Alternatively, public spending would have to be frozen in real terms for five years - and given automatic increases in tax credits, social security benefits and other items, that would mean a painful squeeze in the government's cherished areas of health and education.

The IFS also suggests the picture for public debt is far worse than Darling predicted in his autumn pre-budget report. Instead of peaking below 60% of GDP, it says without drastic remedial action, the government's debt-pile is set on an inexorable upward path, and will burst through 80% of GDP by 2015-16.

A Treasury spokesman said, "the chancellor will set out his forecasts at the time of the Budget. As he has said, he will have to balance support for the economy now, with the need to ensure that in the medium term all countries live within their means."

The Conservatives, who have made the case against a new fiscal stimulus a major political dividing line with Labour, seized on the figures. Philip Hammond, shadow chief secretary to the Treasury, said, "now the G20 has left town, these figures from the independent IFS bring us back down to earth with a bump - reminding us of the massive hole in the public finances."

He said the Tories would tackle the problem by establishing an independent "office of budget responsibility," staffed with experts, which would give its verdict on government tax and spending plans.

LibDem Treasury spokesman Vince Cable said Darling would have to do more at the budget on 22 April to show how he will fix the finances in the long term. "The government must be clear as to its direction of travel; broad ceilings on public spending will only lead to salami slicing and inefficient cuts in public services, which will do nothing to confront the problem head on," he said.

However, the IFS does point out that the costs of any new fiscal stimulus will make up only a small slice of the heavy fiscal burden Britain will have to bear.

Its renewed warning about the state of the public finances came as the TUC added its voice to demands for a radical new investment package. Brendan Barber, its general secretary, called for a £25bn spending boost, including programmes for building 100,000 affordable houses; subsidising home insulation; and supporting renewables projects that have run into problems as a result of the credit crunch. They would also like to see the Jobseekers Allowance increase by at least £15 a week, from its current level of £60.50.

"The government had little choice about bailing out the banks and underwriting loans. But while this has stopped financial meltdown it is not enough to get the economy rolling again," said Barber.

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