The Treasury has been accused of underestimating how much of an impact planned cuts to welfare and central Government department budgets will have on the economy.
A study led by City University academics has indicated that Westminster could face having to borrow billions of pounds above what it has accounted for, by 2020, if planned cuts go ahead.
With the next Budget set to go ahead this week, the news does not complement Chancellor Osborne’s fiscal charter, which states that a ruling Government should only borrow during times of severe economic hardship.
City University’s Richard Murphy, who has advised the Labour party on financial policy, said: “The very low multiplier the Treasury uses assumes that cuts in Government spending will stimulate growth. That’s an assumption, and not a fact.
“It is one the IMF now disagree with. And the result of basing policy on that multiplier is we have more cuts than we need, lower growth in the UK economy as a result, lower earnings for most households and so lower tax revenues – which actually makes balancing the government’s books harder.”
The Office for National Statistics (ONS) recently released data which showed that higher government spending in October, combined with lower corporation tax receipts than initially predicted, meant borrowing was the highest it had been for that month since 2009.
The City University report concludes that additional debt amounting to £40 billion will be the result of planned cuts, rather than the £10 billion budget surplus.