What measures does the IFS suggest to balance the books?

We journalists are not supposed to call the Institute for Fiscal Studies “respected”, because that introduces a value judgement into the fiercely contested world of think tanks, many of whom are competing for the chancellor’s attention before a Budget.

But the IFS tends not to be accused of bias, and its assessments are treated with almost as much reverence as the official – but also independent – Office for Budget Responsibility (OBR).

So the IFS’s pre-Budget assessment is indeed treated with respect, and the institute has almost become part of the unwritten constitution that surrounds fiscal events. Most of the media therefore accepts its report, issued today, as definitive. It estimates that Rachel Reeves needs to raise taxes or cut spending by £22bn a year to get back to the position in last year’s Budget, when she met her fiscal rules with £10bn a year to spare.

It is true that £22bn a year is at the lower end of the estimates of how badly the public finances have deteriorated over the past 12 months. But the IFS also says that simply getting back to where the public finances were a year ago is not good enough. It says that Reeves was asking for trouble by cutting it so fine, and that if she leaves such a small margin for error again, she risks having to come back next year or the year after with yet more tax rises or spending cuts.

So it suggests that she should give herself another £20bn a year of “headroom” in order to reassure the markets that she really has gained control of the public finances. The IFS points out that the only reason the twice-yearly OBR forecasts are a problem is that she was so close to breaking the fiscal rules. The answer is not to move to once-yearly forecasts – “the fiscal equivalent of throwing the baby out with the bathwater” – but to have a bigger buffer.

Yet a £42bn-a-year rise in taxes or cut in spending would be huge – about the same as last year’s tax rise – and would almost certainly require Reeves to break her manifesto promise not to raise the main taxes (income tax, national insurance, VAT and corporation tax).

It goes without saying that the IFS is against allowing borrowing to increase. The national debt is already high and the interest payments are, as it points out, about the same as the spending of the Department for Education.

The institute comments with some understatement: “Her previous attempts to cut spending on pensioner benefits and working-age benefits are now expected to deliver far smaller savings over this parliament than she initially envisaged.” Labour MPs rebelled against savings, and the government is under political pressure in the opposite direction, to lift the cap on benefits for larger families.

Other reductions are unlikely, the IFS says, because spending plans have only just been announced, and a reduction pencilled in for the later years of the planning period “would lack credibility”.

The IFS starts by making this unpopular point: “While taxes are already high by UK historical standards – and already forecast to rise more – most Western European and Scandinavian countries have successful economies with much higher tax revenues as a share of national income.”

But it is worried that further tax increases will further distort economic incentives and suppress growth. “If the government chooses to raise more in taxes instead, there is a very strong case for combining revenue-raising measures with well-designed tax reform that reduces some of the many unwelcome and unnecessary distortions caused by the present tax system,” it says.

It does not go into detail, but it is clear from the IFS’s other recent work that it regards stamp duty as a bad tax, and it would be sympathetic to replacing it with an annual property tax. The institute was not keen on last year’s rise in employers’ national insurance contributions, and it would point out that any increase in VAT would add to inflation.

It is too discreet to say so, but I suspect that it would, if pressed, reach the same conclusion as The Independent, that the fairest and most efficient tax rise would be a rise in income tax.

Over to you now, chancellor.