Budget 2011: Osborne&#39;s strategy at risk of &#39;being blown off course&#39;

Average households to be �750 a year worse off while NHS funding pledge is 'sailing perilously close to the winds'

George Osborne's deficit-cutting strategy is at risk of being blown off course by rising prices and slower growth, the Institute for Fiscal Studies has warned, threatening the coalition's pledge to raise NHS spending every year.

In its analysis of the budget, the independent thinktank also estimated that the average household would lose �750 this year as a result of higher taxes and benefit cuts implemented by the chancellor since coming to power. "Over the whole parliament, tax and benefit changes will hit household incomes to the tune of more like 5%, or �1,500 a year," said the IFS director, Paul Johnson.

David Cameron promised that spending on the health service would rise in real terms ? adjusted for inflation ? in each year of the current parliament, but the IFS said Osborne would have to find more cash to avoid breaking the pledge next year.

Gemma Tetlow of the IFS said the government was only fulfilling its promise in 2011-2 because NHS spending in the current financial year had been lower than Osborne forecast in October's spending review. She added that the next four years would be the tightest spending period for the NHS since the 1950s.

On the Treasury's current plans, the IFS calculates that NHS spending will fall in 2012-3 and stagnate in 2013-4, before rising by just 0.1% in the final year of the parliament.

Paul Johnson said: "The government is meeting its pledge, but is sailing perilously close to the wind."

John Healey, the shadow health secretary, seized on the IFS analysis, saying the NHS faced a real terms cut in the next two years. "David Cameron is more concerned with his ideologically driven NHS reorganisation than keeping his promises on the health service," Healey said. The business secretary Vince Cable defended the budget in the Commons, saying the cuts were, "painful but very necessary," and caused by Labour's mismanagement of the economy.

The shadow chancellor Ed Balls described the government's strategy as, "deeply flawed, misguided and unfair". He said: "My advice to the chancellor is take the blinkers off and look at what is actually happening out there in our economy. It's hurting but it's not working."

Cable hit back, accusing Balls of "bumptious self-confidence," and adding that Labour's starting point, "seemed to be that the past was another country, that 2010 was year zero".

The IFS's number crunching revealed that the overall impact of Wednesday's budget - in which a headline-grabbing petrol duty cut was paid for by a windfall tax on North Sea oil companies - would be minimal. But Johnson said that together with the worsening inflation outlook, the downgrades to growth forecasts by the Office for Budget Responsibility would make deficit targets harder to meet. "In terms of the fiscal plans, it's steady as she goes. But risks to the plans are already beginning to crystallise in lower predicted growth and higher predicted inflation," he said.

Brendan Barber, general secretary of the TUC, said the OBR's forecasts revealed that the squeeze on hard-pressed families was set to continue, and urged Osborne to slow the pace of cuts. "The government must heed the economic warning signs and change course," he said. "Over 100,000 people will be marching through central London on Saturday to call on the government to abandon its damaging cuts and to set out an alternative based on jobs, fairer taxation and growth."

Overall, IFS analysis shows that the government's austerity plans ? including the VAT rise and other tax increases, as well as reductions in benefits and tax credits, are highly regressive, hitting those at the bottom of the income scale hardest.

By 2015, the poorest 10% of the population will be more than 6.5% worse off as a result of the squeeze, while the richest 10% will lose out by just over 3%. Only those at the very top of the income scale - earning more than �100,000 a year ? will lose more than the poorest in society.

Osborne said Wednesday's statement would move Britain "from rescue, to reform, to recovery". But IFS experts expressed scepticism about many of the measures in his Plan for Growth, published alongside the budget.

Helen Miller, an IFS economist, echoed the chancellor's claim to have "put fuel in the tank of the economy," said, "these measures might have put fuel in the tank, but they have done very little to affect how many miles we'll get to the gallon."

Chris Huhne, the climate change secretary, defended the decision to take 1p off fuel duty, despite previously warning that the UK "must get off the oil hook". He said high prices were causing hardship, particularly for people in rural areas. "We need to take account of people's concerns. But in the long run price signals are very clear ... sometimes you need to go backwards to make a bigger jump forwards."

Too close for comfort

Nick Clegg inadvertently played to some Liberal Democrats' worst fears when he was caught telling David Cameron that he could not see what the two men could disagree about in a general election TV debate in 2015.

The deputy prime minister was caught making the jokey aside after the two men had appeared together in Nottingham, left, at a post-budget question-and-answer session.

At the end of the public meeting, Cameron told their audience that the event might have been "a bit better-natured between the two of us" than the TV debates would be during the 2015 election campaign. But as they left backstage, Clegg forgot his TV mic was still turned on and said to the prime minister: "If we keep doing this, we won't find anything to bloody disagree on in the bloody TV debates."

The Lib Dem leader was then seen looking down at his mic ? realising that, like Gordon Brown during the 2010 general election, his words would be picked up by the broadcasters.

The remark was dismissed as a joke by his aides, but it will fuel concerns among some Lib Dems that their leader will find it difficult to establish a separate identity to fight the Tories in 2015 after working for so long with Cameron in government.

Labour said it was already considering telling broadcasters it will not be involved in three-way TV debates with Clegg and Cameron on the basis that they are both from the government. Patrick Wintour