Tax rises and more cuts if Scotland votes No in 2014

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     By a Newsnet reporter

The Institute for Fiscal Studies has warned that the UK faces massive austerity cuts and increased taxes after 2015, saying that the UK government will have to raise a further £12.5bn.

In their post-budget analysis, the IFS says that the Chancellor will have to introduce such swingeing cuts in his 2015 budget that they will be impossible for an incoming government to implement, as some departments risk facing 50% spending cuts.

If Scotland votes No in 2014, the country will have to bear its share of the massive future cuts, which Paul Johnson, director of the IFS, describes as “grim”.

The IFS notes that the austerity cuts planned for the coming two years have been moderated by tax cuts and increases in the personal allowance for Income Tax. However the Institute warns that from the financial year 2015-16 onwards, the picture is likely to change.

The IFS analysis says that current UK government policy implies reductions in day-to-day spending on public services  between 2015/16 and 2017/18 totalling of £23 billion.  This represents a cut of 7.6%, leaving budgets 18.4% below 2010 levels, after taking inflation into account. Departmental spending would be below 2003 levels in real terms and below 1998 levels as a share of national income.

However, if health, schools and aid continue to be ring-fenced and protected from the cuts, unprotected areas could see cuts of 14.5% over the 3 year period.

Just to keep annual reductions in spending to the same rate seen since 2010 would require the Government to find £9 billion from other sources, such as tax rises or cuts to welfare or pensions. Government departments would also have to find another £3.5 billion to cover additional National Insurance payments for public sector workers as a result of the decision to bring forward the introduction of single-tier pensions to 2016, bringing the total shortfall to £12.5 billion across the UK.

If some areas of spending, such as the NHS and international aid, continue to be ring-fenced, “the outlook for all other unprotected spending looks grim indeed”, said the IFS head.

Speaking to Public Finance magazine, Tony Travers, a director of research at the London School of Economics and a specialist in local government finances, said:

“You wouldn’t know it from the headline figures, but local government, along with some other unprotected and unloved public services, looks likely to face at least 50% spending cuts between 2011-12 and 2017-2018.”

The IFS believes that it would be impossible for any government to raise the required funds through cuts alone, and that tax increases would be necessary to cover the shortfall.  The tax rises would most likely be introduced by the incoming government after the 2015 Westminster General election.    

Paul Johnson of the IFS said: “If I was betting, I would not be betting that all of the current planned fiscal consolidation post-2015 will happen through departmental spending.”

He added that his best guess was that the UK government will use a combination of tax rises, borrowing and cuts in “annual managed expenditure” – mostly made up of welfare and pensions – to take some of the pain off public services.  He commented: “Post-election budgets tend to raise a lot of tax.”

The cuts are due to be implemented after Scotland’s historic independence referendum in 2014.  If Scotland votes No, the pressure from Conservative backbenchers on the Coalition government to scrap the Barnett Formula, which offers Scotland a degree of financial protection, is likely to increase.  This could potentially see Scotland facing a double-whammy of cuts to the country’s public services.