Very significant spending cuts to come, think tank warns

"Very significant" government spending cuts will still be imposed before the next general election, an influential think tank has warned.

Paul Johnson, director of the Institute for Fiscal Studies, said that George Osborne's Spending Review on Wednesday was "not the end of austerity".

"This Spending Review is still one of the tightest in post-war history," he said.

The chancellor surprised many by axing planned changes to tax credits.

Mr Osborne said the Spending Review was not an end to "difficult decisions", but that higher than expected tax receipts and better public finances had provided some room to manoeuvre.

Labour's shadow chancellor, John McDonnell, accused Mr Osborne of spin.

"We said this was a smoke and mirror spending review and we were right. IFS research today shows that George Osborne has not reversed his welfare cuts, he has just delayed them," he said.

Despite the chancellor's decision to abandon changes to tax credits planned for next year, Mr Johnson said the long-term cost of the move would be nil.

"Why? Because the equivalent cuts to Universal Credit, now legislated, were left untouched," he said. "The long-term generosity of the welfare system will be cut just as much as was ever intended."

Universal Credit is a new welfare payment that merges six benefits into one. It is being phased in over the next few years, starting in different regions at different times.

The IFS estimated that 2.6 million families would be an average of £1,600 a year worse off under the new system of Universal Credit than they would be under existing tax credits, but 1.9 million would be £1,400 better off.

However, no individual families will lose out.

Anyone transferring from the existing benefits system to Universal Credit will see their payments protected.

Only new claimants will receive less money.

It is very important to realise that these figures don't describe what will actually happen in the next few years, because current claimants of the benefits and tax credits covered by Universal Credit will have the cash amount they are receiving protected.

The 2.6m and other figures describe what would happen if everyone was switched over to the new, less generous, system overnight, without protection, which is not what the government has mapped out.

In fact, Universal Credit will be introduced gradually up to around 2020. Existing claimants won't be switched over until 2018 or later and they will be protected.

They can lose their protection if their circumstances change, for instance if they gain or lose a partner or if their income rises to take them out of benefit then falls again.

Small changes in income or having a child would not result in the protection being lost.

The think tank, which conducts independent economic analysis, highlighted the danger of Mr Osborne missing his own economic target.

Mr Johnson said that Mr Osborne would "need his luck to hold out" given the chancellor's self-imposed target of achieving a surplus in 2019-20.

"If he is unlucky - and that's almost a 50-50 shot - he will have either to revisit these spending decisions, raise taxes, or abandon the target," he said.

The IFS also highlighted the tax rises contained in the statement.

They include the apprenticeship levy on large employers that will raise £3bn, the £1.7bn from a 2% levy on council tax to pay for more social care; and the near-£1bn to be generated by higher stamp duty for second homes and buy-to-let properties.

Mr Johnson said the stamp duty move was "ill-designed" because it reintroduced a cliff edge that Mr Osborne had abolished just a year ago.

The IFS also mentioned other spending cuts, such as the 40% reduction in capital grants for housing associations by 2017-18.

Wednesday's statement revealed glimpses of Mr Osborne's desire to reform the public finances, it said.

"He really is cutting spending on non-pension benefits to its lowest level relative to national income for about 30 years," Mr Johnson said.

"The changes to local government financing and devolution are genuinely radical and could transform both the role of local government and the UK's fiscal architecture."