Tory tax cuts will be paid for by a “sharp” fall in public spending, says a leading research body.

The Institute for Fiscal Studies said reductions in national insurance and a tax break for firms announced in the Autumn Statement would be offset by higher for longer inflation. This delayed fall in prices would result in more pain for cash strapped households.

But, under Chancellor Jeremy Hunt’s plans, it means the Treasury would rake in more tax receipts over the next few years. The Office for Budget Responsibility forecast on Wednesday that inflation would take a year longer to fall to the Government’s 2% target.

IFS Director Paul Johnson said: “Inflation may be coming down, but it was increases in the OBR’s forecast for inflation that saved the Chancellor’s bacon.” He said the cost of the cut in national insurance from 12% to 10% and the making of “full expensing” for firms permanent would be offset by increased revenues because of inflation.

These are likely to include higher VAT receipts and millions more people dragged into higher income tax brackets. “Put another way, the tax cuts are paid for by planned real cuts in public service spending,” said Mr Johnson. Yet the government also faces a surge in debt interest payments.

Mr Johnson went on: “Given the demands of servicing our debt, and presumably paying for more healthcare and pensions, achieving that will require some sharp cuts in many areas of public spending.” Mr Hunt was likely to meet his target of reducing government debt as a proportion of national income “by the narrowest of tiny margins”, the IFS said.

But it warned this was on the basis of “questionable, if not plain implausible, assumptions”. Mr Johnson said: “Like his predecessors Mr Hunt has taken a modest improvement in the public finance forecasts and spent most of it. “He has spent up front and told us he will meet his targets largely by unspecified fiscal restraint at some point in the future.

“What he will do in March if the OBR downgrades its forecasts we do not know. Any such downgrading would leave him with a big headache. More importantly he or his successor is going to have the mother and father of a headache when it comes to making the tough decisions implied by this statement in a year or two’s time.”

The IFS also criticised Mr Hunt for claiming that permanent “full expensing” for plant and machinery against corporation tax was “the biggest business tax cut in history”. Mr Johnson said: “That is an overblown claim.”

And in a warning to Labour, he added: “I’m not sure I’d want to be the Chancellor inheriting this fiscal situation in a year’s time.”