Raise income tax rate by 3p... or face record cutbacks: Think-tank warns of black hole in public finances

• Institute for Fiscal Studies said tax hikes are inevitable to avoid further cuts
• Hike would mean every family is hit with a tax raid of £481 between 2015-17
• Otherwise, 35% will have to be slashed from most departmental budgets

Taxes will have to rise by more than £12billion – the equivalent of 3p on the basic rate of income tax – after the general election, a report claimed yesterday.
In a grim assessment of the state of the public finances, the Institute for Fiscal Studies said the hikes are virtually inevitable to avoid ‘unprecedented’ further cuts to public services that would slash 35 per cent from most departmental budgets.
And it predicted that 1.2million public sector jobs will have been cut between 2010 and 2017 – 300,000 more than the independent Office for Budget Responsibility has predicted.

Warning: The Institute for Fiscal Studies claims income tax will need to rise by 3% to prevent a black hole in public finances

IFS director Paul Johnson said the ‘shock and awe’ figures are necessary because the sluggish performance of the economy means the Chancellor is already borrowing £64billion more than he planned to at the time of the 2010 Budget.

The IFS claimed that whoever wins the next election will need to find ‘around £50billion’ to keep the economy on track and shrink the deficit. And if the next government continues the same policy of three parts cuts to one part tax rises, that will require about £12.5billion of extra taxes.
That means every family in Britain can expect to be hit with a tax raid of £481 between 2015 and 2017.

Rising costs: Chancellor George Osborne is already borrowing £64billion more than planned at the time of the 2010 budget

It is a measure of how badly the economy is doing that the last time the IFS made its calculations – after the Chancellor’s Autumn Statement just two months ago – it said taxes would need to rise by £7billion, roughly the size of the international aid budget.
Since the Government has ring-fenced spending on the NHS, schools, international aid and military equipment, the alternative to putting up taxes, according to the IFS’s budget that was published yesterday, would be to slash departmental budgets further. That would see draconian cuts of 35 per cent to the police, transport and armed forces personnel.
Mr Johnson said such cuts would be politically ‘almost impossible’, making tax rises or further borrowing necessary. He added: ‘We shouldn’t lose our sense of shock and awe at these numbers. They are all pretty much unprecedented.’
Senior Tory sources said their plans for the period between 2015 and 2017 currently envisage further cuts but not tax rises.
The IFS said the fairest way to raise large amounts of money is to put up the basic rate of income tax for the first time in four decades. But its Green Budget also pointed out there could be further cuts to welfare payments. The IFS mapped out options to abolish child benefit altogether, cut benefits for pensioners and reduce pension entitlements.
A Treasury spokesman said: ‘As the Institute for Fiscal Studies shows, the Government continues to tackle the deficit in a way that ensures those with the broadest shoulders bear the heaviest burden.’
But Shadow Treasury minister Rachel Reeves said: ‘The IFS shows how badly the Government’s plan has failed. By choking off the recovery, the Chancellor is now borrowing billions more than he planned as the costs of economic failure mount.’