Weakness of economy means chancellor will have to cut spending or raise taxes by £22bn more than proposed in 2010
George Osborne will need to cut government expenditure or raise taxes by £48bn in the next Treasury spending round, according to a report.
Research by the Social Market Foundation thinktank (SMF) and the Royal Society of Arts found that the weakness of the economy had left the chancellor with a bigger fiscal gap when he next sets out his multi-year spending plans.
The study, Fiscal Fallout, predicted that additional cuts of 23% would be needed from Whitehall departments if the government wanted to continue ringfencing the budgets for health and overseas aid.
Using models employed by the Office for Budget Responsibility, the independent fiscal watchdog set up by Osborne in 2010, the paper said borrowing was on course to be higher than expected at the time of the 2012 budget and that the economy had less potential to bounce back from its worst postwar recession.
The chancellor's 2010 spending review announced deep cuts in departmental spending for the 2010-15 parliament and pencilled in £26bn of additional cuts for the next spending round to complete the repair work. Ian Mulheirn, the SMF's director, said a further £22bn of cuts would now be needed.
"According to the OBR's own models, the economy appears to have less room to bounce back than previously thought," Mulheirn said. He said the UK's structural deficit – the shortfall in the public finances that will remain even when the economy has fully recovered from its double-dip recession – was 1.1% of GDP higher than forecast in March.
"Combined with high public borrowing since March this implies a much bigger black hole in the public finances, making the stakes for the next spending review higher than ever," Mulheirn said. "Combined with the savings pencilled in at the last budget, the developments since March mean that the chancellor will have to lay out some eye-watering cuts at the next spending review and will prolong austerity deep into the next parliament."
The report said the necessary savings would require real (inflation-adjusted) cuts in Whitehall departmental spending of 3.7% a year between 2015 and 2018, compared with real reductions of 2.3% in the current spending round. "Looking across the decade, the combined effect of the 2010 spending review and the next one will, on current plans, mean that by 2018 spending in some departments will have been decimated," Mulheirn said.
The paper said some unprotected departments such as the Home Office and the Ministry of Justice would be more than 40% smaller than they were at the start of the decade.