Britain's new age of austerity

A bleak picture of a future Britain once again shamed by its public services was conjured up yesterday as the true cost of fixing the nation's finances emerged from the fog of Treasury statistics. Whatever the political furore over the 50p tax rate, most of the burden of plugging the £1.3 trillion hole in the nation's coffers over the next decade will fall on the public services, says the respected and independent Institute for Fiscal Studies (IFS).

Despite the Chancellor's pledge yesterday that "we will protect investment in schools, hospitals and other key public services", the IFS found that it is precisely that public investment in infrastructure that seems set to bear the brunt of the cuts after the next general election.

The news from the IFS, which has dug deep into the Treasury's figures, could scarcely be gloomier. With public debt destined to be "high for a generation", the IFS warns that:

*The cost to every family of fixing the budget deficit, in cuts to their public services and tax hikes, will be £2,840 per year for a decade: an annual national bill of £90bn.

* Investment in public services will be slashed by almost one-fifth every year for three years.

* The 50p top tax rate may raise nothing or lose the Treasury money.

* Child poverty will still be above the Government's target next year.

Such is the long-term crisis facing the authorities that almost every department will see its budget slashed – in real terms – after 2011.

Cuts to "front line" services seem inevitable. The IFS predicts the public services will be starved of funds in a way not seen since the last cash-strapped Labour government left office in 1979. It promises to be a more savage assault even than that attempted by Margaret Thatcher at the height of her power in the 1980s.

The entire increase in spending Labour achieved since it won its second term in 2001, including its policy of raising NHS funding to European levels – will be wiped out, the IFS says. Only the overseas aid and intelligence services budgets will be protected.

The British public may once again have to become used to run-down hospitals, schools with leaky roofs and the worst roads in western Europe.

Robert Chote, the director of the IFS, said the "breathtaking" situation may require more urgent action: "Investors may take the view that a problem of this scale should be dealt with more quickly than Mr Darling plans to do. Convincing people that you will do what you say over two years is hard enough, let alone over two parliaments."

If investors lose their appetite for UK government debt, that will push up interest rates, frustrate the Bank of England's policy of "quantitative easing"– injecting cash into the economy through buying gilts – and choke off even a modest recovery. Even as things stand, the IFS warns that the nation faces "two parliaments of pain".

In his Budget, Mr Darling admitted the public sector would only see a real terms rise of 0.7 per cent a year after the next election; but the IFS's "plausible assumptions" about rising debt payments, unemployment benefits and other adjustments, leave spending departments facing annual budget cuts of about 2.3 per cent, after inflation.

The unprecedented pressure on the public finances also comes from a collapse in tax revenues, down £50bn this year, with worse to come. Treasury figures indicate a permanent destruction of about 5 per cent of the UK economy's productive capacity – £70bn per year, and a lower tax take to match.

Even the credibility of the £7bn contribution from increased taxes on the rich was cast into doubt by the IFS analysts, who judged that a combination of evasion, avoidance, reduced effort, early retirement, emigration and lower spending (damaging VAT receipts) mean they "cannot tell whether combined policies will raise as much as hoped".

And, in a final blow to one of Labour's few concrete pledges and one of its most cherished ambitions, the researchers say the rise in the child tax credit of £20 per child per year in April next year will be "nowhere near enough to meet the target of halving child poverty".

The IFS did not quite say it, but the nation may by now realise that, as far as public spending is concerned, "the party's over".

State of the nation: Where the cuts may fall

Health

Budget (2009-10): £105.5bn

At risk? Efficiency savings planned from shorter stays in hospital, lower drug costs and improved commissioning by primary care trusts. Public health and prevention vulnerable; sexual health, mental health and services for the elderly may also be targets.

Home affairs

Budget: £10.2bn

At risk? Neither party will want to look "soft" on law and order in run-up to election, especially with crime rising in the recession. But £3bn identity cards scheme would be scrapped by Tories. Possible savings after election include cutting police computer costs.

Budget: £190bn

At risk: Both parties would like to cut it but spending will grow because of rising unemployment. Some schemes for jobless may be wound down after recession. Tories may end New Deal and scale back tax credits.

Justice

Budget: £10.3bn

At risk? Titan prisons likely to be scrapped. More prisons could be privatised. Intercept Modernisation Programme, a £12bn database, could be questioned. More pressure on £2bn legal aid budget. Court fees could be raised.

Local government

Budget: £39bn

At risk? Tempting target for any government since local authorities may get blame for service cuts or higher council tax bills, which can be capped by central government to impose cuts. Squeeze on staff numbers inevitable.

Transport

Budget: £14.7bn

At risk? Both Labour and the Tories are strongly committed to a high-speed rail hub at Heathrow – but capital projects are always vulnerable to delay during a squeeze. Large-scale infrastructure projects, such as road building and repair programmes, may be scrapped. Network Rail to come under pressure.

Defence

Budget: £47.8bn

At risk? Two aircraft carriers costing total of £2.6bn, may be delayed again. Armoured vehicles programme vulnerable. Joint strike fighter project with US could be grounded.

The arts

Budget: £2.1bn

At risk? Relatively small budget. Arts groups are already feeling the pinch but are always liable to be squeezed even further. Cultural development projects, including Own Art, Take It Away and Creative Partnerships at risk.

Schools and universities

Budget: £76.2bn

At risk? Quangos such as the Learning and Skills Council are under threat. Cap on university student numbers may be tightened; £3,145 cap on fees expected to be lifted. Tories pledged to protect schools but not other areas of education.

Overseas aid

Budget: £6.9bn

At risk? Has lost out from 25 per cent fall in value of sterling. Dfid saw off Treasury raid ahead of Budget. Main parties back increased spending.