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Falling wages and lower living standards predicted

Chancellor of the Exchequer George Osborne speaks to pupils during a gymnastics lesson at St Benedict's Catholic Primary School in Garforth, West Yorkshire yesterday, the day after he delivered his Budget statement

Britain faces a period of falling wages and lower living standards following the Budget downgrade of the economic forecasts, a leading economic think-tank has warned.

The Institute for Fiscal Studies (IFS) said the revisions set out by George Osborne in the Commons had implications for the wider economy as well as the public finances.

The chancellor was forced to admit that he would need tens of billions more borrowing after the Office for Budget Responsibility said growth would be lower than expected.

IFS director Paul Johnson said: "That loss largely arises from changes in assumptions about future productivity growth over the rest of the parliament.

"If the OBR is right about that, we should all be worried. This will lead to lower wages and living standards, not just lower tax revenues for the Treasury."

Mr Johnson said that after a revision of the forecasts by the OBR at the time of the autumn statement in November led Mr Osborne to claim he had "found" an additional £27 billion enabling him to abolish planned cuts to tax credits - the latest changes had "lost" the Exchequer £56 billion, leaving a net loss of £29 billion.

He warned that the chancellor was "running out of wriggle room" if he was to meet his self-imposed target of delivering a budget surplus by the time of the next general election.

"His chances of him having a surplus in 2019-20 are only just the right side of 50-50. But it is also important to remember that the rule gets suspended if, at any point, growth drops below one per cent. With lower expected growth the in the economy the chances of this happening is now greater," he said.

"These risks are exacerbated by the fact that there are in fact £8 billion of tax cuts in the Budget. If there was another downgrade in fiscal forecasts of a similar magnitude and the chancellor did wish to remain on course to deliver a budget surplus in 2019-20 then this would surely require more real policy change - presumably incorporating at least some permanent tax rises and specific spending cuts."

Mr Johnson said that the underlying deterioration in the public finances could not be easily "smoothed away" by the chancellor.

"On these forecasts the chancellor has now effectively lost the scope to raise public service spending in 2020-21. The OBR has day-to-day spending by central government on public services flat that year, therefore falling as a fraction of national income. Yet another year of austerity pencilled in," he said.

On the £520 million "sugar tax" which Mr Osborne is to impose of soft drinks from 2018, Mr Johnson said that while there was "sound" case for the levy in economic terms it was "very partial".

"Only around 17 per cent of added sugar consumed comes from soft drinks - though the proportion in households with children is a little higher," he said.

"Obviously the soft drinks tax won't have any impact on the other 80-plus percent of sugar consumption - indeed it might increase it as people move away from soft drinks to other sugary products."

Earlier, Mr Osborne played down suggestions that he will be forced to find more spending cuts or put up taxes in order to balance the books by the time of the next general election.

He insisted he would be able to meet his self-imposed target of delivering an overall budget surplus by 2020 - although he acknowledged he would have to "alter" plans if there was another recession.

"We have got to hold to the course that we have set out," he told BBC One's Breakfast programme.

"A completely independent body which everybody respects - the Office for Budget Responsibility - has looked at those plans and it says 'If you hold to the course, you deliver those plans, if the economy grows as expected, then we will have a surplus towards the end of the parliament'.

"We wouldn't need anything extra like more spending cuts or more tax increases."

But on the BBC Radio 4 Today programme later, he stressed that the commitment applied only if the economy was growing and was not in recession.

"There is a commitment to reach a budget surplus in normal times," he said.

"I'm saying if the economy is growing, if your economy is performing, you should be making sure you don't spend more than you raise in taxes and you should be putting aside money to reduce debt.

"Obviously, if you are in a much worse situation, if you are in a recession for example - and we're not at all in that today, our economy is growing and unemployment is falling - but if you are in a recession then you have to alter your plans."

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