Britain may be forced to suddenly hike taxes or impose austerity measures

Britain’s economy is set to grow by 2.7% this year, the country is heading towards full employment, and real wages have risen by 7% over the last two years.

Everything looks pretty good for Britain’s economy and it suggests that the worse is behind us.

However, London-based think tank Institute for Fiscal Studies warned that Britons could face some surprise tax rate hikes or possibly even some more austerity measures because Chancellor George Osborne may feel “boxed in” by his own “ambitious target to eliminate the budget deficit by 2019 — 20 and then to continue to run budget surpluses thereafter.”

The budget deficit is the amount in which expenditures exceed revenue. A budget surplus is when income exceeds expenditure.

The IFS published its warning as part of its annual “Green Budget” document which aims to analyse the issues and challenges facing the country’s Chancellor before the government prepares to unveil his Budget in March every year.

The IFS highlight, in the chapter called “Risks to the rules: tax revenues,” that Britain has only been able to run a budget surplus eight times in the last six decades. It adds that while the Office for Budget Responsibility suggests that Osborne is “on course to achieve this,” it warns that net debt and income projections show that it won’t happen anytime soon.

To meet his £10 billion surplus target by 2015, Osborne may be forced to impose tax hikes or spending cuts. Osborne’s budget surplus target is the equivalent to 0.5% of national income.

Osborne’s promise to the nation is a difficult one to keep, suggests the IFS (emphasis ours):

It could require big tax rises or spending cuts with very little notice in order to ensure it is met. Even if the Chancellor gets to the March 2019 Budget with his plans intact, past errors in official forecasts suggest that there would be more than a one-in-four chance that he would need to implement in-year tax rises or spending cuts to deliver a budget surplus in 2019 — 20.

Osborne is announcing his budget on March 16, and has the tricky task of following through on his deficit-cutting promise.

The Conservative party were only re-elected last year and Prime Minister David Cameron and Osborne promised to not to raise VAT, national insurance or income tax.

The party also campaigned against extra taxes on things like high-valued property, and cut corporation tax.

Altogether, that’s a lot of revenue that now can’t be raised.

The country also has problems in terms of spending. The Conservatives have agreed not to cut health, education, or foreign aid spending. And Cameron has insisted on reaching NATO’s aim for each country to spend an amount worth 2% of GDP on defence.

The IFS pointed out that:

Between the November 2015 Autumn Statement and the end of January 2016, equity prices fell by 7½%. If they were to remain 7½% below the OBR’s latest forecast, this could reduce capital tax receipts in 2020 — 21 by around £2 billion.

So that means Britain has even less money coming in. Osborne is stuck between a rock and a hard place. But looking at figures, you would be forgiven in speculating that spending cuts may be more likely — but you could be wrong.

The IFS warned that (emphasis ours):

The government might raise revenue through changes to the pensions tax regime.

However, it will need to be careful to distinguish between what is genuinely a permanent increase in revenues and what is only a temporary windfall. Relying on temporary revenues to achieve a budget surplus in 2019 — 20 would not be in keeping with the rationale underpinning the Chancellor’s stated fiscal objectives.

But then again, Cameron’s government promised to “triple lock” for pensions, that means they rise at the pace of wage growth or faster every year.

How Osborne proposes to get out of this dilemma will define the budget next month.

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