News Analysis: UK budget plans will mean an extra year of austerity

The UK budget unveiled on Wednesday will mean an extra year of cuts to public services, according to the Institute of Fiscal Studies (IFS).

The IFS, an economics think-tank in London, on Thursday made public its examination of Wednesday's budget from Britain's Chancellor George Osborne.

Carl Emmerson, the deputy director of the IFS, told Xinhua that the cuts to the UK government's spending which began in 2010 under Chancellor Osborne will now have to continue for an extra year than originally planned in order to hit the government's target of balancing its spending with its income.

Emmerson said: "Prior to the Budget the government's plan was that the austerity (program), which started in the summer of 2010 would continue right the way through this decade and finish in 2019/20. Yesterday's Budget -- because the outlook for growth in the UK economy is now worse than it was before -- has basically meant that the public finances are now thought to be in a worse state, and another year of austerity has been pencilled in."

Emmerson said that moving the end of the austerity period back by one year would mean an additional 10 billion pounds (about 14.5 billion U.S. dollars) of spending cuts would have to be found for the financial year 2020/2021.

The UK economy had substantially weakened between Chancellor Osborne's autumn economic statement and the budget on Wednesday, according to the figures the chancellor uses.

Productivity is a key driver of an economy's potential size, and represents the amount of economic output per hour worked.

Data available to Osborne in November for his autumn statement indicated a pick-up in productivity growth in mid-2015 which was consistent with the lessening influence of the effects of the financial crisis and of the start of a return to the pre-crisis levels of productivity growth.

However data over the final quarter of 2015 showed that this was not the case, and productivity figures had in fact gone down over that period, wiping out almost all the gains made in 2015.

As a result, the projected growth in the UK economy was downgraded by about 0.3 percent each year for the next five years, so that growth in 2016 which was expected to be 2.4 percent is now 2.1 percent.

Paul Johnson, the director of the IFS, told journalists at a press conference to unveil the institute's analysis of Osborne's budget, that the consequences of this downgrading of economic forecasts was something "we should all be worried about. This will lead to lower wages and living standards, not just lower tax revenues".

TWO OUT OF THREE TARGETS MISSED

Chancellor Osborne has also missed one of his fiscal targets that he set himself, because of the difficulties of implementing welfare cuts. Money saved from cuts to welfare benefits has not been as much as had been expected in previous forecasts.

Emmerson explained: "His first rule that he set himself is about how much he spends on social security benefits and tax credits -- his so-called Welfare Cap. He set that just under a year ago. Back in November it looked like he was going to breach it in three of the five years going forwards. He is now on course ... to breach it in five of the next five years. So that rule has been broken totally."

A further consequence of the poorer economic performance in 2015 is that Chancellor Osborne has missed a further fiscal target he has set himself.

Emmerson said that Osborne's second rule -- that the debt of the public sector (the amount the government needs to borrow to function) should fall every year, as a share of national income -- was also set to be breached.

"At the end of this month we will get data for the current financial year and it looks likely to show that debt is in fact higher this year (financial year 2015/16) as a share of the economy than it was last year (2014/15). So he is on course to breach that one," said Emmerson.

However, the third and most important fiscal rule that Osborne had set himself is still like to be met.

Emmerson said: "He is still on course to do that, in part because of some tax raises and spending cuts he announced yesterday, but in part because he chose to push some tax revenues into 2019/20 and push some spending out of that year. And that movement of spending and taxes is enough to leave him on course to have a surplus." (1 pound= 1.45 U.S. dollars) Endit