Chancellor George Osborne may be forced to hike taxes or impose further spending cuts "with very little notice" if he wants to meet his surplus target, the Institute for Fiscal Studies (IFS) has said in a damning report. The respected think tank said that Osborne has boxed himself in with the new surplus law, which requires future governments to run a surplus from 2019 to 2020.
The government has said it wants governments to run a surplus "in normal times", instead of dealing with a deficit. The IFS calculated a 25% chance that Osborne would have to announce sudden tax hikes or severe spending cuts to ensure the promised £10bn (€13bn, $14.4bn) surplus by March 2019.
According to the IFS, tax receipts would be a lot lower than initially expected by the Office for Budget Responsibility (OBR) after George Osborne's spending review and autumn statement. Both the Bank of England and the Office for Budget Responsibility have recently downgraded their growth outlook for the UK.
"Osborne's new fiscal charter is much more constraining than his previous fiscal rules," said IFS director Paul Johnson. "With public spending reaching historically low levels relative to national income, promises on tax cuts to keep and pay for, and pressure on revenues from a number of taxes, there may be more tough decisions to come."
"How he responds to any further unpleasant fiscal surprises may, more than anything we have seen so far, come to define his period as chancellor," Johnnson said. The IFS published its annual Green Budget on Monday (8 February), a 260-page long document analysing the UK economy and advising the government on fiscal policy.
The UK has only seen a surplus eight times in the last 60 years, the IFS said, adding that the surplus law is inflexible and leaves little room for movement. The think tank said the government should be able to adapt to the "uncertainty in the fiscal forecasts", slower pay growth and the volatile markets have blown a gaping hole into Osborne's fiscal plans.
Osborne has long said the government wants to "fix the roof while the sun is shining", pushing for an accelerated reduction of the deficit. However, the government has failed to significantly push down public-sector net borrowing.
"Despite turbulence in the global economy, Britain is pushing ahead," a Treasury spokesman told IBTimes UK. "With the risks we see elsewhere in the world, there may be bumpy times ahead – so here in the UK we must stick to the plan that's cutting the deficit, attracting business investment and creating jobs."