The Government has been urged to stick to its spending cut plans by a leading think-tank.
In its Green Budget, which gauges the state of the UK’s finances ahead of the March Budget, the Institute for Fiscal Studies (IFS) said that government borrowing in 2010/11 is likely to undershoot predictions made by the Office for Budget Responsibility.
However, the IFS report added that the Government should resist the temptation to “engage in any significant net giveaway”.
To do so would be to risk fuelling inflation, an effect that could spark a sharp rise in interest rates and a further obstacle to economic growth.
Instead, the Government should “bank” the money.
The IFS report said: “Any fiscal loosening aimed at helping the economy could be ineffective if it prompts an offsetting monetary tightening, and risks undermining investor confidence that the remainder of the fiscal consolidation plan, in which the Chancellor has set such store, will be delivered.”
The IFS warned the next five financial years were “set to be the tightest five-year period for public spending since at least the Second World War”.