8th May 2009
By Tash Shifrin
A powerful committee of MPs has warned that ‘unprecedented’ cuts in public services and substantial tax increases might be needed to claw Britain back from its worst fiscal position since the Second World War.
The Treasury select committee said it was ‘very concerned about the state of the public finances’ in its May 6 report on the Budget.
The report, which followed grim economic forecasts for the UK from the European Commission and the National Institute of Economic and Social Research, cast doubt on Chancellor Alistair Darling’s ‘optimistic’ Budget predictions.
‘We question the decision to assume that the economy will begin registering positive growth as early as the fourth quarter of 2009, and… will register such strong growth in 2011,’ the report said.
Committee chair John McFall said: ‘We all want to see a way out of recession, but we need to be realistic.’
The MPs said it was of ‘critical importance’ that the public and the markets believed the chancellor had ‘an adequate, and credible, plan to restore the public finances’.
They warned: ‘In the medium term, the options for returning the public finances to balance present uncomfortable choices… the broad alternatives being substantial tax increases, unprecedented cuts in public services, or a combination of the two.’
The MPs were scathing in their criticism of the ‘temporary operating rule’ introduced in November’s Pre-Budget Report to replace the government’s defunct fiscal rules. It offered ‘no constraint at all’ on the chancellor’s fiscal decisions, they said. ‘The only real financial discipline on the chancellor is the opinion of the gilt market on the sustainability of the public finances.’
The committee’s report followed NIESR forecasts that the recession would be worse and recovery weaker than Darling predicted. The chancellor said gross domestic product would fall by 3.5% this year, and grow by 1.25% in 2010.
But NIESR warned: ‘The economy will shrink by 4.3% this year, and then experience a weak recovery, with GDP rising by 0.9% in 2010.’
The European Commission’s spring forecast also warned on May 4 that the UK’s deep recession posed a ‘severe challenge’ to the public finances.
