Influential economic think tank the IFS warns of drastic cuts and a million more paying higher rate tax if the government is to make the books balance.
The Institute for Fiscal Studies (IFS) said that welfare cuts and tax rises, coupled with a pledge to protect spending in the NHS and schools, meant that tax rises could be expected in the years after the 2015 general election. It would mean that five million people would be pushed into the higher rate 40p tax band, it said.
The thinktank said that the protection of health and schools would mean that budgets in “unprotected” areas, such as police, local government and defence, could face cuts of 16 per cent after 2015 for three years to make up for a £27bn shortfall.
That would mean that these budgets faced a 30 per cent squeeze since the coalition came to power in 2010.
Paul Johnson, director of the IFS, said “that begins to look inconceivable”, and warned that “further welfare cuts and tax rises must be on the cards”.
He added: “£27bn worth would be required to protect other spending in real terms entirely.”
The analysis, in which Mr Johnson made clear that he would not expect the government to raise taxes by the full £27bn needed, came after George Osborne announced the Autumn statement in the House of Commons on Wednesday.
The IFS said that overall, the plans reduced incomes for the wealthiest and for working-age people on benefits, while giving little to pensioners and workers on modest incomes.
Mr Johnson said that the three year cap of one per cent on rises in most benefits would “clearly create real losses for poor households with the least ability to cope with real falls in their income”.
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He added that lifting the income tax threshold so the first £9,440 of earnings are taken out of income tax was “an expensive policy at a time of fiscal hardship” which only raised the personal allowance by a “paltry” £235.
But he said that despite the one per cent rise on the higher-rate income tax threshold, the organisation estimated that there would be one million more higher-rate tax payers than there are today, “taking the number fo nearly five million – double the number at the end of the 1990s”, Mr Johnson said.
Of the Autumn statement, the IFS said that the effects would be to reduce incomes for the bottom half of the population and for the very wealthiest, but added that incomes for workers on modest salaries and pensioners would go up.
Mr Johnson added: “Working-age individuals receiving benefits and tax credits have been hit. The richest few percent have been hit very hard.
“Pensioners, and those in work on more modest incomes have borne less of the burden. Some of course are riding out the hard times quite comfortably.
“But when you take account of what has happened to earnings, all parts of the working-age population have been losing out.
“In that sense at least, it is probably fair to say that those of us of working age really are all in this together.”