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Last Updated: Wednesday, 31 January 2007, 14:42 GMT
Brown 'faces 20bn funding gap'
Chancellor Gordon Brown
Mr Brown couldn't spend so much on public services, IFS says
If Gordon Brown becomes prime minister, he could face tough decisions on cutting public spending, according to the Institute for Fiscal Studies (IFS).

The independent think tank says that the government will have to save 20bn to reduce the budget gap.

It says that the most likely scenario would see 10bn in increased tax revenues, and 10bn in spending cuts.

The scale of the cuts could force tough choices in order to preserve spending levels in priority areas like health.

Fiscal drag

The IFS suggests that Mr Brown, or his successor as Chancellor, would not necessarily have to raise new taxes.

Debt burden graph

He could get his 10bn by relying on "fiscal drag", the fact that more and more people are dragged into higher income tax bands as the economy grows.

In any case, the Chancellor needs to cut spending and raise tax revenues in order to close the budget gap and meet his fiscal rules.

The IFS suggests that the tough choices will be over spending, with the government about to publish its Comprehensive Spending Review (CSR) in the summer, allocating money for the three years to 2010/11.

And it said that if the growing burden of household debt caused the economy to slow more than expected, it would put the Chancellor's plans in jeopardy.

Spending squeeze

Christine Frayne, of the IFS, said that the days of big increases in government spending were drawing to a close.

The IFS expects that in the next five years current government spending will grow by just 1.9% per year in real terms, slower than the growth rate of the economy, and virtually the same as during the Thatcher-Major years (when it grew by 1.7% in real terms).

The Chancellor has already announced tough spending targets for some departments, including the Home Office, which will be allowed no real growth in spending at all.

But the IFS points out that, even if all other big departments like defence are held to zero real growth, there still will not be enough money to go around to meet the government's targets in health, education and poverty reduction.

It expects the government to drop its pledge to cut child poverty in half by 2010/11, which it estimates would cost an additional 4.5bn in increased child tax credits.

Even so, it expects that further increases in health spending will be substantially below the 6.6% annual real growth rate in the past seven years, and that education will also be given less money than it has received recently.

That squeeze on spending, combined with the increase in the tax burden as a percentage of GDP, could prove an uncomfortable backdrop for Gordon Brown to fight his first election as Labour leader.

Rating the Chancellor

The IFS also gave its evaluation of the Chancellor's ten-year tenure in office.

It said that he was definitely leaving the public finances in better shape than when he came in

But it pointed out that, in terms of international comparisons, other OECD countries have also improved their public finances, so that Britain is still in the middle rank.

And it warned that, although the UK economy has been unusually stable - both in terms of output and inflation over the past ten years - it could be storing up trouble for the future.

The Treasury has said that families are, on average, 980 a year better off than in 1997 as growth in income levels have outstripped tax payments.

David Miles, chief UK economist at Morgan Stanley, said that there were still short-risks due to the high level of indebtedness and the over-heated housing market.

He said if interest had to be raised because inflationary fears became embedded in the economy, that could cause a sharp contraction in the housing market and a rise in personal bankruptcies that could slow the economy.

And that in turn, would throw Mr Brown's fiscal calculations out of kilter, forcing a sharper adjustment in spending, or more tax increases, to maintain a budget surplus.

Uk budget deficit


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