By Chris Giles, Economics Editor Published: April 6 2009 11:41 | Last updated: April 6 2009 11:41 The public finances have deteriorated so much since November that the basic rate of income tax would need to rise by the equivalent of 8 percentage points to bring government borrowing back on track by 2015-16, the Institute for Fiscal Studies said on Monday. Bringing its out-of-date forecasts into line with others, the independent institute said that there was a £40bn gap between the government’s hope of borrowing only for capital spending in 2015-16 and the likely outcome. The warning came ahead of a meeting on Monday between Gordon Brown, prime minister, Mervyn King, the bank of England governor, and Adair Turner, Financial Services Authority chairman, to take stock of the G20 conclusions. Even the figures presented by the IFS on Monday are already likely to be an underestimate of the true deterioration of the public finances. They were based on the Bank of England’s central economic forecast from February, which suggested a contraction of 2.7 per cent in 2009. As Alistair Darling, the Chancellor, conceded at the weekend, the likely figure is worse than this. But the IFS analysis presents Mr Darling with difficult Budget choices. He ditched the government’s previous fiscal rules in November, replacing them with much weaker temporary constraints, but even these will be breached, the IFS analysis shows. It projects that a string of enormous deficits will lead to a growing burden of government debt in perpetuity. This contradicts the government’s new operating fiscal goal of having a declining burden of debt once the global economic shocks have worked through the economy. The IFS’s £40bn figure for additional borrowing in 2015-16 represents 2.7 per cent of national income, the same fiscal tightening as Mr Darling imposed in the pre-Budget report, when he took an axe to the government’s future capital spending programme. The IFS was certain that a similar measure was needed in the Budget in two weeks, citing the intervention of Mervyn King, Bank of England governor, who “publicly and pre-emptively withheld” support for a further fiscal stimulus. If such a fiscal tightening was introduced in the Budget, it would be the equivalent of every family paying an additional £1,250 a year in taxes if public expenditure plans remained unchanged. If public spending plans were cut and no tax rises imposed, there would need to be a five-year freeze in total public spending after adjusting for inflation. Because some areas of government spending rise automatically faster than this, the IFS said, “this would require real cuts in most other areas of government spending, and even favoured areas such as health or education would undoubtedly see much lower spending growth than they have received in recent years”. George Osborne, the shadow chancellor, told the BBC Today programme that he hoped public spending restraint would take the “bulk of the strain” in reducing ballooning government deficits. But he was reluctant to outline areas for pruning apart from suggesting that public sector pay should “reflect the prevailing economic conditions”. Copyright The Financial Times Limited 2009Fresh warning over UK deficit
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