Economists urge deeper cuts and higher taxes

30 Apr 10
The new government must introduce deeper spending cuts and greater tax hikes to protect the UK economy from further financial crises but only when recovery is secured, a leading think-tank has warned
By Lucy Phillips

30 April 2010

The new government must introduce deeper spending cuts and greater tax hikes to protect the UK economy from further financial crises but only when recovery is secured, a leading think-tank has warned.

The National Institute of Economic and Social Research said current plans for fiscal tightening in the March Budget were insufficient and £30bn of extra measures should be introduced, split equally between public spending cuts and tax rises. This would put the UK in a position to cope with future economic disasters but it would require actions such as a 6p rise in the national rate of income tax and a 5% reduction in public sector wages over the next five years. 

Launching the NIESR’s latest economic forecast on April 30, Ray Barrell, director of macroeconomic forecasting, said: ‘We have to have a shock absorber in place to pay for the next crisis. Hopefully, there won’t be more wars but we can’t remove the probability of financial crises.’

As a safeguard the institute said government borrowing needed to be brought down to 3% of gross domestic product by 2020. It is currently at a post-war high of 11%.

NIESR director Martin Weale added: ‘Policy has to be grounded on the assumption that there will be occasional disasters. We should not go back to what was essentially a Labour approach that everyone is going to be fine because there won’t be any more crises.’  

But while the think-tank advocated more stringent fiscal tightening, it warned against cutting spending too much until economic recovery was secure. The £6bn of additional savings planned for this year by the Conservatives could result in a slower rate of economic growth and up to 60,000 job losses, Barrell cautioned.

But shadow chief secretary to the Treasury Philip Hammond responded: ‘Decisive action is required to restore business confidence and strengthen economic growth. That’s why the Conservatives have set out a plan to start reducing the deficit in 2010 by cutting government waste.’

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