Chancellor warned of need for 'Plan B' on economy

In its annual Green Budget, the Institute for Fiscal Studies gave a broad endorsement of Mr Osborne's approach and said he would be wrong to use his March 23 Budget to seek to sugar the austerity pill with tax and spending giveaways. But it warned he may miss his target of eliminating the deficit over the next four years, due to "sluggish" GDP growth and the "formidable" difficulty of delivering cuts on a scale not seen since 1945.

Among industrialised nations, only Greece was seeking to reduce its deficit at a rate as fast as the UK, and only Ireland and Iceland were cutting public spending so quickly, the report said.

Planned cuts totalling 81bn might prove "formidably hard to deliver", it said, particularly in services such as the police where manpower reductions will be "difficult to achieve cost-effectively on the proposed timescale".

Meanwhile, growth over the medium-term is likely to be lower than predicted by the Office for Budget Responsibility (OBR), whose forecasts are used by the Chancellor to plan his Budget.

"Overall, with such large downside risks to the public finances, having alternative plans to hand could prove useful," said the report.

"The Government should review its spending settlements in a couple of years' time in light of any changes to the economic and fiscal outlook."

Labour's Shadow Chief Secretary to the Treasury Angela Eagle said: "The IFS report is right to warn about the serious risks to growth that our economy faces and that without growth George Osborne won't meet his own deficit reduction targets."