Britain faces "hugely challenging" cuts in public services after next year's general election if Chancellor George Osborne is to achieve his target of returning the nation's finances to surplus by 2018/19, a respected economic thinktank warned today.
The Institute for Fiscal Studies warned against a "false sense that all is now well" as a result of the return to healthy growth in the economy, pointing out that only 40% of Mr Osborne's cuts will have been delivered by the end of this year, with the remaining 60% still to come.
However, forecasts provided to the IFS by Oxford Economics painted a sunnier picture, raising the prospect that solid GDP growth in the next few years may remove the need for the Chancellor's austerity plans to be implemented in full.
Oxford Economics predicted 2.6% growth for this year, and said the UK economy was getting ever closer to achieving "escape velocity" from the downturn.
Their analysis suggested that the economy has a "significantly larger" amount of spare capacity than estimated by the Government's official forecasters, the Office for Budget Responsibility, meaning that "we could plan for much less fiscal consolidation, as more of the deficit would prove to be a temporary phenomenon".
The IFS Green Budget found that, even with £12 billion in additional cuts to social security spending, the protection granted to areas like health and international development leave other departments facing overall cuts of more than 30% in their budgets under Mr Osborne's plans, compared to where they stood when the coalition came to power in 2010.
And the Government is facing additional fiscal pressures from expected population growth of 3.5 million between 2010 and 2018 and a two million increase in the numbers of over-65s, who make greater demands on the NHS.
The expected ageing of Britain's population means that even if health spending rises in line with inflation, real age-adjusted spending per person will be 9% lower in 2018 than in 2010, said the IFS. And a larger population means that cuts in public spending of 1.7% a year translate into a 2.4% reduction per person.
Meanwhile, additional spending commitments made by the Government after 2015 have already reached £6 billion, piling up pressure for more cuts elsewhere. And the IFS sounded a warning about the Treasury's increasing reliance on a small group of 300,000 super-rich taxpayers in the top 1% of earners, whose share of total income tax has risen from 11% in 1979 to 27.5% now.
Even if Mr Osborne succeeds in achieving a budget surplus by 2018, national debt will have swollen to 76% of national income by that date and would return to pre-crisis levels only in the mid 2030s, warned the IFS. With debt at that level, just paying the interest will take up nearly 4% of national income.
IFS director Paul Johnson said: "Returning growth, and forecasts suggesting we should be running a Budget surplus by 2018/19, should not lull us into a false sense that all is now well with the public finances.
"The outstanding debt will still be very large and the scale of additional spending cuts required to hit that budget surplus remains hugely challenging, especially on top of cuts already delivered. A combination of significant additional spending pledges already made and a growing and ageing population will only add to the challenge."
But Andrew Goodwin, senior economist at Oxford Economics said: "The UK recovery is getting ever closer to achieving 'escape velocity', although the unbalanced nature of the recovery to date emphasises the need to avoid complacency.
"Nevertheless, we believe that an improving global outlook will provide the basis for the recovery to broaden out this year, by supporting export growth and giving firms the confidence to invest their large cash piles.
"Our forecast also emphasises the problems associated with targeting a cyclically-adjusted measure of borrowing. Oxford Economics analysis suggests that the economy has a significantly larger amount of spare capacity than the OBR estimates which, in turn, suggests that the medicine of austerity could end up being applied in a dose higher than the patient actually needs."
The IFS poured cold water on Liberal Democrat Deputy Prime Minister Nick Clegg's call for further rises to £12,500 in the level at which workers start paying income tax.
Further significant increases in personal allowance would be "expensive and poorly targeted at helping the low paid", as one in six workers now pay no income tax and would therefore not benefit. Only 15% of any further rises in the threshold level would go to workers in the bottom half of the earnings ladder, said the IFS.
But the thinktank was even less complimentary about Labour's proposal to restore the 10p starting rate of income tax, saying that it was "hard to find a coherent economic rationale" for the change, which would be " if anything, less well targeted on the low paid and would add unnecessary complexity".
The IFS warned that current support for childcare was "not well designed" and that - despite proposals from all sides for more spending - there was little evidence that it was effective in allowing mothers to enter the labour market.
IFS deputy director Carl Emmerson said: "Despite the state of the public finances, tax cuts and spending increases are being considered by Government and opposition. They seem agreed in promising additional spending on childcare despite a remarkable lack of evidence as to its effectiveness.
"They seem equally set on further cuts in income tax, either though more increases in the personal allowance or the introduction of a 10p starting rate. Either could be expensive and would be poorly targeted on the low paid."
The IFS found "no evidence" of a housing bubble as a result of the Government's controversial Help to Buy policy, but pointed out that prices remain below their pre-crash peak by 17% in London and 25% in the rest of the country.
But it suggested that focusing Help to Buy on new-build homes only would "moderate the risk that the policy might push up house prices".
Following Labour's call for a freeze on energy prices and the Government's decision to strip out some green levies from power bills, the IFS urged politicians to exercise "care" in their interventions in the energy market.
It suggested that the independent Competition and Markets Authority should instead be asked to carry out a review of the market.