More tax rises and spending cuts needed to repair public finances

MoneyGreater efforts will be required to reduce public borrowing than those promised by measures set out in the pre-Budget Report, a leading think tank has argued.

The Institute for Fiscal Studies (IFS) has said that a further £13 billion of tax increases and spending cuts need to be found by 2015 if the government is to convince investors of its determination to correct the level of public debt run up during the recession.

In its ‘green budget’, the IFS estimated that an additional tax take and more expenditure cuts were needed over and above the £57 billion already planned.

Current plans for fiscal tightening amount to 4.1 per cent of GPP; the IFS believes that figure must be nearer 5 per cent, or £70 billion.

The projected squeeze on public spending is already the most severe since the 1970s when the International Monetary Fund demanded swingeing cuts.

However, in its report the IFS also warned against taking too premature an axe to public spending.

The UK economy, the IFS claimed, is still so fragile that it would not be able to cope with draconian fiscal tightening in 2010.

The report said that the Treasury should avoid “putting the recovery at undue risk with significant extra tax increases or spending cuts in the coming year”.

Robert Chote, the IFS director, described fiscal tightening as more a marathon than a sprint: “It is more important to show that you can last the course rather than be leading off the first bend.”

The IFS calculation that the Treasury would have to find £70 billion through tax rises and public spending cuts was based on the Chancellor’s forecast that the recession had sliced 5 per cent off the economy and that growth would return to its trend of 2.75 per cent over the medium term.

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