Budget squeeze needed to encourage spending

Gordon Brown

According to the Institute for Fiscal Studies (IFS), an extra GBP£13 billion in tax rises or spending cuts is needed by 2015-16.

The IFS in its annual assessment of the public finances said the move is needed to reassure investors in government bonds, and to address the possibility the underlying damage to the public finances is even greater than the government believes.

Despite their warnings, they have cautioned against any extra budget tightening in 2010, because of the fragile state of the economy.

The IFS predicts economic growth will be two percent a year over the next five years, lower than the Treasury's suggested three percent.

It has also forecast that weak consumer spending and a muted rebound in capital investment will hinder economic growth.

National Institute of Economic and Social Research

A separate report by the National Institute of Economic and Social Research (NIESR) said tighter spending controls will be needed if the government is to halve the budget deficit over the next four years.

"Plans for fiscal consolidation will not be sufficient to start bringing down net public debt as a share of GDP by the middle of this decade, as the Treasury expects. Instead it will carry on rising," the report said, the BBC stated.

According to the IFS's "Green Budget", whoever forms the government after the general election will need to improve public finances by a greater amount than that set out in the pre-Budget report.

It says the government should aim for fiscal tightening of five percent of national income, or GBP£70 billion, by 2015-16, as opposed to the 4.1 percent planned.

The report said the Treasury has underestimated the structural damage to public finances and that investors need to be reassured that they will be repaired promptly.

In its report NIESR predicted unemployment would peak at 2.9 million in the third quarter of 2011. The UK economy emerged from recession in the last three months of 2009, with weaker-than-expected growth of 0.1 percent.NIESR said growth should accelerate in the coming months, with the economy expanding by 1.1 percent in 2010 and 2.0 percent in 2011.

It warned the recovery would be dependent on exports, with consumer spending likely to fall by 0.3 percent this year.

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