Britain faces a £25bn black hole by 2020, according to the IFS

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Falling tax revenues will leave Britain with a £25bn black hole by the end of the current parliament, according to new analysis.

The Institute for Fiscal Studies estimates the Treasury will take in £31bn less in tax receipts by 2019/20 than forecast in the last budget.

However, the economic think tank said the sum could be offset by a saving of £6bn on payments the UK currently needs to make to the EU budget, but will no longer make after Brexit.

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But the remaining £25bn that must be found by the Exchequer will leave Britain £15bn further in the red by the end of the parliament – a far cry from the £10.4bn surplus forecast by former chancellor George Osborne.

IFS research economist Thomas Pope said Chancellor Philip Hammond should respond “cautiously” to the gloomy forecasts.

“Growth forecasts are almost sure to be cut, leading to a significant increase in the deficit even if all the very challenging spending cuts currently planned are in fact delivered,” he explained.

He added: “Given the levels of uncertainty he might be wise to respond cautiously for now.

“Any new fiscal targets should be reasonably flexible. Any decisions to increase spending or cut taxes in the short run should be taken in the knowledge that significant further austerity after 2020 looks to be on the cards.”

Almost all leading economic forecasters have revised growth down since the vote to leave the EU, leading the IFS to assume the Treasury's Office for Budget Responsibility will do the same.

The IFS suggested Hammond could boost the economy in the short run through “well targeted” action with discretionary tax cuts or spending increases.

But it said he should prepare for further austerity in the next parliament if growth is predicted lower in the long term as a result of Brexit.

Last week the Chancellor reportedly told Cabinet colleagues to expect a modest fiscal stimulus with infrastructure spending in the low billions of pounds in the autumn statement.

According to the Financial Times he will adopt a flexible fiscal framework allowing for "headroom" to react to further negative developments in the wake of the Brexit vote. 

Last week the Bank of England significant upgraded its forecast for economic growth next year, citing stronger-than-expected household spending since the decision to leave the EU. 

GDP is now predicted to increase by 2.2 per cent in 2016, 1.4 per cent in 2017, and 1.5 per cent in 2018; the Bank’s previous projections in August were 2 per cent, 0.8 per cent and 1.8 per cent.

Elsewhere, the IFS noted the UK Government had not met a single one of the three spending targets Geroge Osborne set himself a year ago, after the plan to reach a surplus by 2019/20 was dropped.

The other two were a cap on welfare spending – which Osborne breached in his U-turn on tax credits – and that the national debt should fall as a proportion of GDP.