£27 billion hole in Budget revealed

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More sweeping tax rises and welfare cuts are on the cards in the three years after the 2015 general election to fill a £27bn gap in the Government’s budget, a leading think-tank revealed as the scale of Britain’s financial woes becomes clear.

The highly-respected Institute for Fiscal Studies (IFS) said it was “close to inconceivable” that further tax hikes and benefit cuts could be avoided after forecasts in the Autumn Statement revealed that sluggish growth will leave the economy 3.6 per cent smaller in 2016/17 than was expected just nine months ago.

In a bleak analysis, IFS director Paul Johnson said the Government’s decision to protect the NHS, schools and overseas aid from spending cuts will create unbearable pressure on other areas like the police, local government, transport, and defence, if allowed to continue beyond the 2015 general election.

Mr Johnson said the figures in the Autumn Statement suggest unprotected departments will face cumulative cuts totalling 16 per cent in the three years to 2017/18 in the absence of more welfare reductions or tax rises, unless the Chancellor takes the politically difficult decision to allow the NHS, schools and pensions to take some of the pain.

This would mean an overall squeeze of almost one-third of the budgets of these unprotected departments since the formation of the Coalition in 2010.

“That begins to look close to inconceivable,” said Mr Johnson. “Further welfare cuts and tax rises must be on the cards.

“£27bn-worth would be required to protect other spending in real terms entirely.”

In its analysis of the impact of Wednesday’s ‘mini-Budget’, the IFS said that “broadly the people who are doing a bit better are pensioners and people in work paying basic-rate tax”. Those at the very top and those living on benefits lost out, it said.

Mr Johnson also revealed a below-inflation rise in the threshold for the 40p rate of income tax will drag a further 1m workers into the higher-rate by 2015.

By that point the 40p rate would be paid by more than five million people, he said, more than double the level in the 1990s and so would no longer be the preserve of the “highly-paid few”.

Labour, however, said it was women who will be among the hardest-hit by the latest fiscal changes, and accused George Osborne of targeting new mothers with a £180 “mummy tax”.

The Chancellor’s decision to impose a one per cent cap on rises in maternity pay over the next three years – in line with most other working-age benefits – will hit women who take time off work after giving birth, said the party’s equalities spokeswoman, Yvette Cooper.

The West Yorkshire MP said: “New mums are paying a heavy price for George Osborne’s economic failure.

“The Chancellor tried to pretend yesterday that he was targeting what he characterised as 
the work-shy. But the truth is 
that he is hitting millions of working people and cutting £180 from new working mums who take maternity leave to care for their babies.”

The Treasury, however, rejected suggestions that women were being unfairly targeted, pointing out that the rise in the personal allowance for income tax and the largest-ever cash rise in the basic state pension will disproportionately benefit women.

Meanwhile, concern continues to grow over whether the Chancellor’s failure to hit his target on debt will harm Britain’s credit rating. Mr Osborne yesterday conceded that losing the gold-standard AAA rating would be a blow, but insisted that international investors continue to regard Britain as “a good investment”.