Brexit Could Derail Osborne's Fiscal Charter

The Institute for Fiscal Studies' annual Green Budget suggests a Brexit vote could lead to greater indebtedness and lower productivity growth.

The economic think tanks predicts UK growth of 2.2% in 2016 - down from 2.3% last year - with the upcoming referendum on the UK’s EU membership having the potential to generate the greatest degree of uncertainty.

The report also casts doubt on Chancellor George Osborne's pledge to run a budget surplus in "normal times", something the IFS gives a 50-50 likelihood of success.

Given the UK has only run a surplus eight times in the last six decades, Mr Osborne's pledge was always viewed with a pinch of scepticism.

The IFS said he needs to find £8bn of promised income tax cuts that are currently unfunded, suggesting further tax rises or spending cuts could be announced in next month's budget.

"Uncertainty in the fiscal forecasts means that he [George Osbrone] may well have to cut spending further or raise taxes to get to surplus in 2019-20," said IFS head Paul Johnson.

Risks to growth are "very much skewed to the downside", Mr Johnson added.

Wage growth, which has been slowing since the summer, could also spell further pain for Mr Osborne.

Even (Taiwan OTC: 6436.TWO - news) if wages grow just one percentage point below forecasts, the Chancellor would be greeted with a £5bn shortfall.

The first official figures showing if Mr Osborne has met his 2019-20 surplus target are due to be released just days in advance of the 2020 general election - an election which the Conservatives are currently expected to win.

The IFS also cast doubt on the Office for Budget Responsibility's official tax revenue forecasts.

It said that if the US raises interest rates more sharply than currently expected, the public budget might only balance rather than reach a surplus by 2019-20.

The recent stock market declines also mean that unless the lost ground is made up before 2019-20, this alone may result in a reduction to tax revenues of about £2bn.

The IFS went on to say there is "a clear case for reform to the way that motoring and alcohol are taxed", suggesting they should be scrutinised by the Treasury ahead of the March budget.

The report argues that fuel duty does little to address congestion and that a move towards road pricing would be more effective.

It also says alcohol duty needs to be examined so that it is focussed on heavy drinkers who are most likely to generate alcohol-induced harm.