Magazine article Public Finance

Public Services Warned to Prepare for Three-Year Freeze

Magazine article Public Finance

Public Services Warned to Prepare for Three-Year Freeze

Article excerpt

Public services face the prospect of a three-year real-terms spending freeze from 2010 as the government attempts to get its finances back on track, the Institute for Fiscal Studies has warned.

In its annual Green Budget the IFS also offered a gloomy assessment of the long-term state of the public finances in the wake of the current economic crisis.

The economists' grim analysis came as speculation increased that the government might soon launch a second fiscal stimulus package to shore up the worsening economy with the International Monetary Fund warning that the UK economy would shrink by 2.8% next year, more than any other advanced country.

The possibility that this year's Budget might be deferred until after the G20 gathering in early April was also rumoured this week

The IFS said the government would need tax increases or spending cuts worth an extra ?20bn a year by the end of the next Parliament, to 'repair the public finances as planned in November s Pre-Budget Report'.

It added: 'Even if [the government] acts, public sector debt may well not return to pre-crisis levels for more than 20 years'

The PBR had signalled a reduction in public spending growth from 1 .9% a year to 1 . 1 % from 201 1/12 in an attempt to restore the public finances when the economy recovers. This would wipe a total of £37bn from planned public spending.

But the Green Budget, published on January 28, spelled out what this meant, noting that government projections for public spending growth in the next Spending Review period showed much slower growth than its previous reviews - and slower than under the 18 years of Conservative governments'.

The squeeze on Whitehall departments might be even more severe because of unavoidable spending commitments such as social security benefits and debt interest payments.

'Total departmental spending may well have to be frozen in real terms over the three years,' it warned. 'In that event, most departments are likely to see real cuts, with only high priorities such as health and education being allocated any real growth.'

Capital-intensive areas, such as transport and housing, would be hardest hit because of the planned freeze on investment spending.

The IFS said the squeeze would put major government policies at risk. 'Earnings indexation of the basic state pension is likely to be delayed, pushing up pensioner poverty. The government is also projected to miss its child poverty target for 2010... and it could stay above the target for some time after 2010/11. …

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