IFS warns of tax rises and longer austerity

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LONDON (ShareCast) - The Chancellor could be forced to announce yet more spending cuts or tax increases for the next parliament when he makes his Autumn Statement, according to a leading economic forecaster.

George Osborne is due to update the country on the government's latest official borrowing and growth forecasts on December 5th.

The Institute of Fiscal Studies (IFS (SES: E1:I49.SI - news) ) said the Treasury could have to raise VAT to 25% as tax revenues falter and the economy continues to struggle.

Osborne may also have to abandon one of his fiscal targets - that overall UK debt should be falling in 2015-16, as well as pushing austerity measures into 2018, the IFS report added.

"Since the budget, the outlook for the UK economy has deteriorated and government receipts have disappointed by even more than this year's weak growth would normally suggest," said IFS deputy director Carl Emmerson.

"The planned era of austerity could run for eight years - from 2010-11 to 2017-18."

The IFS said that if the trend for borrowing so far this year continued for the remainder of 2012 borrowing in 2012-13 would total £133bn, which is £13bn higher than forecast by the Office for Budget Responsibility (OBR).

In what it called its "pessimistic scenario", the think-tank estimated Osborne could need to find another £11bn in tax rises or welfare cuts for the period following the election.

This would have to come on top of the £8bn of welfare cuts mooted in his March Budget speech.

The IFS recommended the Chancellor drop his target for overall debt to be falling in 2015 as it "does not actually have much to commend it in terms of the economics of managing the public finances".

It also warned Osborne that a recent Treasury windfall from quantitative easing should not be factored into his figures.

Interest paid on gilts bought through QE is to be transferred from the Bank of England to the Treasury under recent changes in a move that could net the government up to £35bn.

However, the IFS said this did not directly materially change the long-term outlook for the public finances.

"In order to avoid any possible perception that the change was made in order to make his fiscal targets easier to meet, the Chancellor should instruct the OBR to exclude the impact of this change from all the figures when assessing compliance with the fiscal targets," the report recommended.