The Institute of Fiscal Studies (IFS) has argued that taxes in the upcoming March Budget could be viably cut in order to boost the economy.

The IFS Green Budget suggests the Government, despite major planned cuts, will underspend by more than £3 billion this year.

As a result, Government borrowing is set to be less in 2011-2012 than official forecasts made by the Office for Budget Responsibility (OBR), meaning that taxes could be reduced temporarily.

The IFS are also optimistic that borrowing could be £9 billion lower in 2016-17 than previously expected, providing that the economy picks up as both they and the OBR expect.

However, whilst the IFS Green Budget suggested that 'the case for a significant short-term fiscal stimulus to boost the economy is stronger than it was a year ago', it also placed heavy emphasis on the UK's on-going economic instability.

It warned that Chancellor George Osborne will most likely remain cautious about reducing taxes due to significant downside risks to personal finances, both from the Eurozone crisis and from future pressure from an aging population.

The Green Budget says: "Should the Eurozone break up, or the economy do much worse than forecast for other reasons, then future borrowing would be increased and one - or both - of the Chancellor's fiscal targets would be broken.

There seems little prospect that it would prompt an offsetting monetary tightening in the present climate. But a small loosening would be likely to deliver only a small boost to the economy, while a big one might risk undermining investor confidence."

Paul Johnson, IFS director, said: "The Chancellor faces his third budget with the economy and public finances in considerably weaker shape than he had hoped a year ago.

While it looks as though central government is going to underspend against tight spending plans, this neither leaves much space for any permanent fiscal loosening."

The IFS also criticised other policy details such as the current tax system, proposed Child Benefit reforms and the 50p income tax rate, all of which it believes needs to be taken into consideration to improve economic performance.