Years of 'austerity' for UK economy

It could take the length of “two parliaments of pain” before the economy recovers, a thin-tank has claimed.

The Institute for Fiscal Studies (IFS) said that the government will have to raise another £45 billion a year, either through taxation or spending cuts, on top the measures already announced in the Budget.

The extra money is needed to meet the government’s own forecasts on reducing the national debt.

The IFS calculated that the cost, in taxes or in lost public spending, to every household in the UK would be £2,840 every year by 2017.

According to the IFS figures, the tax rises and spending cuts would need to climb after the next general election and must hit £90 billion a year over a period of eight years.

In the Budget, the Chancellor predicted that government borrowing would rise to £175 billion this year, to be followed by £173 billion next year, in order to supplement a decline in tax revenues and to pay for current spending plans.

Robert Chote, the director of the IFS, said: “The Treasury’s assessment of the fiscal damage wrought by the current economic and financial crisis is breathtaking.

“It will require two full parliaments of mounting austerity to repair.”

In the view of the IFS, national debt will not return to below 40 per cent of GDP until 2032, so stretched are the public finances.

Even the passing of the recession may not bring relief from the need for swingeing public expenditure cuts, the IFS argued.

In some sectors of the economy, such as finance, there has been a permanent loss of output as a result of the credit crunch.

With that loss has come a corresponding drop in tax revenues, which has created a structural deficit in the public finances that the end of the recession of itself will not solve.