By Tash Shifrin
26 November 2009
The government must balance the need to reduce the public deficit against fears that swift public spending cuts could worsen the recession, economists have warned.
Chancellor Alistair Darling will set out plans to cut the deficit in his December 9 Pre-Budget Report. He will aim to halve the deficit over four years, in line with the duty in the Fiscal Responsibility Bill announced in the Queen’s Speech.
Darling is under pressure from the Conservatives, who have said they would take more radical action to restore the public finances.
Bank of England governor Mervyn King also urged tough action in an appearance before the Commons Treasury select committee on November 24. He repeated warnings that the UK’s credit rating could be in danger, and hinted that the bulk of the deficit should be tackled within a single Parliament – a far tighter timescale than that set by Darling.
The government must have a credible plan to bring down the deficit ‘very significantly’ over the lifetime of a Parliament, King told the MPs. But he added that the pace of change should be ‘contingent upon the state of the economy’.
King spoke a day ahead of revised gross domestic product figures, published by the Office for National Statistics, which showed the economy was still in recession, with a 0.3% contraction in the three months to September.
Gemma Tetlow, senior research economist at the Institute for Fiscal Studies, told Public Finance: ‘King hasn’t been explicit about what “significant” means.’
She cautioned: ‘The risk in cutting public spending or increasing taxes would be that the economy is too fragile, and that withdrawal of demand would plunge it back into recession.’
But, she added: ‘Clearly the level of public borrowing is not sustainable in the medium or long term. There is a danger that this could affect the UK’s credit rating – and that will push up borrowing costs with a further impact on public spending.’
Charles Davis, senior economist at the Centre for Economics and Business Research, told Public Finance: ‘The key point is that it’s an immensely difficult balancing act.’
The centre-Left think-tank Compass urged Darling to put up taxes rather than slash spending in the PBR.
26 November 2009
The government must balance the need to reduce the public deficit against fears that swift public spending cuts could worsen the recession, economists have warned.
Chancellor Alistair Darling will set out plans to cut the deficit in his December 9 Pre-Budget Report. He will aim to halve the deficit over four years, in line with the duty in the Fiscal Responsibility Bill announced in the Queen’s Speech.
Darling is under pressure from the Conservatives, who have said they would take more radical action to restore the public finances.
Bank of England governor Mervyn King also urged tough action in an appearance before the Commons Treasury select committee on November 24. He repeated warnings that the UK’s credit rating could be in danger, and hinted that the bulk of the deficit should be tackled within a single Parliament – a far tighter timescale than that set by Darling.
The government must have a credible plan to bring down the deficit ‘very significantly’ over the lifetime of a Parliament, King told the MPs. But he added that the pace of change should be ‘contingent upon the state of the economy’.
King spoke a day ahead of revised gross domestic product figures, published by the Office for National Statistics, which showed the economy was still in recession, with a 0.3% contraction in the three months to September.
Gemma Tetlow, senior research economist at the Institute for Fiscal Studies, told Public Finance: ‘King hasn’t been explicit about what “significant” means.’
She cautioned: ‘The risk in cutting public spending or increasing taxes would be that the economy is too fragile, and that withdrawal of demand would plunge it back into recession.’
But, she added: ‘Clearly the level of public borrowing is not sustainable in the medium or long term. There is a danger that this could affect the UK’s credit rating – and that will push up borrowing costs with a further impact on public spending.’
Charles Davis, senior economist at the Centre for Economics and Business Research, told Public Finance: ‘The key point is that it’s an immensely difficult balancing act.’
The centre-Left think-tank Compass urged Darling to put up taxes rather than slash spending in the PBR.
