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| Budget 'must raise taxes by £8bn' | Budget 'must raise taxes by £8bn' |
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| Chancellor Alistair Darling will have to raise taxes by £8bn in his Budget if he is to keep to the "golden rule", according to a respected think tank. | Chancellor Alistair Darling will have to raise taxes by £8bn in his Budget if he is to keep to the "golden rule", according to a respected think tank. |
| The Institute for Fiscal Studies' (IFS) Green Budget warned that without the increases the government would miss its fiscal target on public borrowing. | The Institute for Fiscal Studies' (IFS) Green Budget warned that without the increases the government would miss its fiscal target on public borrowing. |
| The IFS said that the economic slowdown would reduce corporate tax revenues, widening the budget black hole. | The IFS said that the economic slowdown would reduce corporate tax revenues, widening the budget black hole. |
| And it warned that the government could also break its debt rule by 2010/11. | And it warned that the government could also break its debt rule by 2010/11. |
| That rule would be immediately breached if the government is forced to count its loans to the Northern Rock as part of its debt, which would then soar to 45%, well above the Treasury's 40% limit of total public debt as a share of GDP, or gross domestic product. | That rule would be immediately breached if the government is forced to count its loans to the Northern Rock as part of its debt, which would then soar to 45%, well above the Treasury's 40% limit of total public debt as a share of GDP, or gross domestic product. |
| And with the government starting a new economic cycle with a large current deficit, it is likely to struggle to meet its "golden rule" - that borrowing and spending should balance out over the whole period of ebbs and flows in growth. | And with the government starting a new economic cycle with a large current deficit, it is likely to struggle to meet its "golden rule" - that borrowing and spending should balance out over the whole period of ebbs and flows in growth. |
| Difficult choice | Difficult choice |
| The IFS said that, with the slowing economy, the government is facing a difficult choice. | The IFS said that, with the slowing economy, the government is facing a difficult choice. |
| If it raises taxes, it might slow the economy further. | If it raises taxes, it might slow the economy further. |
| But Robert Choate, the IFS director, said that a modest tax rise could be offset by further interest rate cuts by the Bank of England, which are widely expected later this year. | But Robert Choate, the IFS director, said that a modest tax rise could be offset by further interest rate cuts by the Bank of England, which are widely expected later this year. |
| And he argued that it was vital that the government restored some credibility to its fiscal rules, after a period in which it seemed to be always changing the goalposts. | And he argued that it was vital that the government restored some credibility to its fiscal rules, after a period in which it seemed to be always changing the goalposts. |
| He said that the government had been continually revising upwards its budget deficit, and "the day of judgement cannot be postponed forever".Economic uncertainty | He said that the government had been continually revising upwards its budget deficit, and "the day of judgement cannot be postponed forever".Economic uncertainty |
| However, new forecasts from David Miles, chief economist at Morgan Stanley, showed that any further slowdown in economic growth could throw the budget calculations completely off-course. | However, new forecasts from David Miles, chief economist at Morgan Stanley, showed that any further slowdown in economic growth could throw the budget calculations completely off-course. |
| Morgan Stanley forecasts that if the UK has just a mild economic slowdown, with economic growth of 1.75% in 2008, and a recovery to 2.25% by 2009, then it will take until 2011/12 for the current budget to return to surplus. | Morgan Stanley forecasts that if the UK has just a mild economic slowdown, with economic growth of 1.75% in 2008, and a recovery to 2.25% by 2009, then it will take until 2011/12 for the current budget to return to surplus. |
| But on their pessimistic case, with UK growth slipping to just 0.5% in 2008, and 1.75% in 2009, public sector net borrowing would double to £68bn by 2011/12 and total government debt would rise well over target to over half of GDP. | But on their pessimistic case, with UK growth slipping to just 0.5% in 2008, and 1.75% in 2009, public sector net borrowing would double to £68bn by 2011/12 and total government debt would rise well over target to over half of GDP. |
| This scenario could happen if the credit crunch got worse, causing house prices to fall further and sharply curbing consumer spending. | This scenario could happen if the credit crunch got worse, causing house prices to fall further and sharply curbing consumer spending. |
| Spending squeeze | Spending squeeze |
| The IFS also pointed out that in order to keep the budget deficit under control, the government will have to stick to the very tough spending targets announced in the comprehensive spending review in October | The IFS also pointed out that in order to keep the budget deficit under control, the government will have to stick to the very tough spending targets announced in the comprehensive spending review in October |
| Public spending is planned to rise by just 2.1% per year, half the rate in the last decade, and will fall as a share of national income. | |
| The IFS said there could be particular problems in several areas: | The IFS said there could be particular problems in several areas: |
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| On health, the IFS says that government spending needs to be between £6bn and £10bn higher than planned to meet Derek Wanless's target of developing a world-class health service. | On health, the IFS says that government spending needs to be between £6bn and £10bn higher than planned to meet Derek Wanless's target of developing a world-class health service. |
| Recent research by the Office for National Statistics has shown that productivity in the health service has not been rising as fast as investment, not yielding the outcomes that were hoped for. | Recent research by the Office for National Statistics has shown that productivity in the health service has not been rising as fast as investment, not yielding the outcomes that were hoped for. |
| And the IFS argues that the government will need an extra £3.4bn to have a 50% chance of meeting its poverty target of reducing child poverty in half by 2010/11. | And the IFS argues that the government will need an extra £3.4bn to have a 50% chance of meeting its poverty target of reducing child poverty in half by 2010/11. |
| But the biggest squeeze on public spending next year will be on local government, which is only getting a 1.5% spending increase in the next two years, while council tax increases are being capped at 5%. | But the biggest squeeze on public spending next year will be on local government, which is only getting a 1.5% spending increase in the next two years, while council tax increases are being capped at 5%. |
| This could lead to big cuts in discretionary council services, or pressures to raise council taxes further, according to the think tank. | This could lead to big cuts in discretionary council services, or pressures to raise council taxes further, according to the think tank. |
| Public sector pay | Public sector pay |
| The IFS also said it is wrong to argue that the 2% inflation target means that the government must keep public sector pay below that level. | The IFS also said it is wrong to argue that the 2% inflation target means that the government must keep public sector pay below that level. |
| It said that pay could rise further, taking into account the rise in productivity and differences in "pay drift" - when pay goes up automatically. | It said that pay could rise further, taking into account the rise in productivity and differences in "pay drift" - when pay goes up automatically. |
| The report suggested that there is scope for a higher rate of increases for teachers, doctors, and the armed services. | The report suggested that there is scope for a higher rate of increases for teachers, doctors, and the armed services. |
| It also suggested that pay increases should be targeted towards London and the Southeast, where the public sector is having recruitment difficulties, rather than spread evenly around the country. | It also suggested that pay increases should be targeted towards London and the Southeast, where the public sector is having recruitment difficulties, rather than spread evenly around the country. |