LONDON--U.K. Chancellor of the Exchequer George Osborne may be forced to announce billions of pounds of further spending cuts in next week's budget statement as the weak economy makes it increasingly difficult for him to meet his fiscal rules, a leading economic think tank said Monday.
The Institute for Fiscal Studies said the additional spending cuts--which it believes could be as high as 11 billion pounds ($17.5 billion)--would see the era of austerity last until 2017-2018, meaning the squeeze will run for eight years rather than the five years Mr.
Osborne originally planned. In a separate report Monday, centre-right political think tank the Centre for Policy Studies called for Mr. Osborne to use the budget statement on Dec.5 to announce an overhaul of the tax relief given on wealthy Britons' pension contributions--relief that costs the government GBP7 billion a year.
The CPS recommends Mr. Osborne scraps the relief and replaces it with a 10% tax rebate on pension assets' dividends and interest income, a move that would cost GBP4 billion per year, therefore saving the government GBP3 billion annually.
Such a move would be popular with the Liberal Democrats--the junior partners in the coalition government--who are longstanding proponents of reducing the tax relief available to wealthy Britons.
In the IFS report, the think tank's deputy director Carl Emmerson said the outlook for the U.K. economy has deteriorated markedly since the March Budget, and the revenue the government receives from tax receipts has been far weaker than expected.
While the economy returned to growth in the third quarter after nine months of contraction, many economists expect it to shrink again in the fourth quarter. Mr. Emmerson said the weak economy has serious implications on whether Mr. Osborne will meet his fiscal rules.
The IFS said the chancellor is on course to breach the debt rule, which stipulates the ratio of net debt to gross domestic product must be falling by 2015-16.
"The chancellor would likely be best advised to abandon the rule and consult on replacing it with something that better ensures long-run sustainability rather than engage in significant further fiscal tightening in order to remain on course to comply with this target," the report said.
The other fiscal rule is to eliminate the structural budget deficit, the part of the deficit that remains when the economy is in full health, over a five-year rolling period.
The IFS said in a pessimistic scenario--where this year's economic deterioration is a permanent phenomena--Mr. Osborne will need to extend the austerity measures until 2017-2018 and will need to implement a further GBP11 billion of spending cuts in order to meet the rule.
Even under a more optimistic scenario--where the economic deterioration is a temporary phenomena--Mr. Osborne would still need to instigate the additional GBP8 billion of spending cuts to the welfare budget that he announced in the March budget and would need to make cuts to government departmental budgets of 2.3% a year from 2015 to 2017, the report said.
The findings of the report will fuel the contentious debate under way in the U.K. over whether the chancellor should make more spending cuts to meet the rules or whether he should allow the targets to slip.
Critics say imposing further cuts would choke off the country's fragile economic recovery, while those in favor of additional cuts believe any deviation from the path of returning the public finances to health could alarm international investors, causing the country's borrowing costs to rise.
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The Institute for Fiscal Studies said the additional spending cuts--which it believes could be as high as 11 billion pounds ($17.5 billion)--would see the era of austerity last until 2017-2018, meaning the squeeze will run for eight years rather than the five years Mr.
Osborne originally planned. In a separate report Monday, centre-right political think tank the Centre for Policy Studies called for Mr. Osborne to use the budget statement on Dec.5 to announce an overhaul of the tax relief given on wealthy Britons' pension contributions--relief that costs the government GBP7 billion a year.
The CPS recommends Mr. Osborne scraps the relief and replaces it with a 10% tax rebate on pension assets' dividends and interest income, a move that would cost GBP4 billion per year, therefore saving the government GBP3 billion annually.
Such a move would be popular with the Liberal Democrats--the junior partners in the coalition government--who are longstanding proponents of reducing the tax relief available to wealthy Britons.
In the IFS report, the think tank's deputy director Carl Emmerson said the outlook for the U.K. economy has deteriorated markedly since the March Budget, and the revenue the government receives from tax receipts has been far weaker than expected.
While the economy returned to growth in the third quarter after nine months of contraction, many economists expect it to shrink again in the fourth quarter. Mr. Emmerson said the weak economy has serious implications on whether Mr. Osborne will meet his fiscal rules.
The IFS said the chancellor is on course to breach the debt rule, which stipulates the ratio of net debt to gross domestic product must be falling by 2015-16.
"The chancellor would likely be best advised to abandon the rule and consult on replacing it with something that better ensures long-run sustainability rather than engage in significant further fiscal tightening in order to remain on course to comply with this target," the report said.
The other fiscal rule is to eliminate the structural budget deficit, the part of the deficit that remains when the economy is in full health, over a five-year rolling period.
The IFS said in a pessimistic scenario--where this year's economic deterioration is a permanent phenomena--Mr. Osborne will need to extend the austerity measures until 2017-2018 and will need to implement a further GBP11 billion of spending cuts in order to meet the rule.
Even under a more optimistic scenario--where the economic deterioration is a temporary phenomena--Mr. Osborne would still need to instigate the additional GBP8 billion of spending cuts to the welfare budget that he announced in the March budget and would need to make cuts to government departmental budgets of 2.3% a year from 2015 to 2017, the report said.
The findings of the report will fuel the contentious debate under way in the U.K. over whether the chancellor should make more spending cuts to meet the rules or whether he should allow the targets to slip.
Critics say imposing further cuts would choke off the country's fragile economic recovery, while those in favor of additional cuts believe any deviation from the path of returning the public finances to health could alarm international investors, causing the country's borrowing costs to rise.
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