UK government needs another £13bn, says economic forecast

The UK government needs to find another £13bn (€14.8bn) in tax hikes or spending cuts over the next five years to help restore the UK's ailing public finances, a leading economic forecaster warned today.

The UK government needs to find another £13bn (€14.8bn) in tax hikes or spending cuts over the next five years to help restore the UK's ailing public finances, a leading economic forecaster warned today.

Measures already unveiled amount to a tightening of £57bn (€65bn), or 4.1% of national income, the Institute for Fiscal Studies (IFS) said as it called on the British Treasury to do more.

Its Green Budget said ministers should be "somewhat more ambitious" and aim for belt-tightening amounting to £70bn (€79.9bn), or 5% of income, in the five years to 2015/16 to reassure international investors of the determination to tackle the deficit.

It said: "To make the repair job credible, the British government should spell out as clearly and promptly as possible how and when it intends to deliver the overall tightening."

But the IFS warned the British government against squeezing too soon in the 2010/11 financial year, "given the likelihood of a slow and tentative recovery".

The IFS said tax hike options to raise 1% of national income, or £15.4bn (€17.5bn), included a three percentage-point hike in income tax rates and national insurance contributions, as well as lifting VAT to 21%.

But it also put forward potential savings in social security spending. These include a one-off freeze on benefits and tax credits which could save £4.1m (€4.68m) a year, as well as removing or means-testing benefits to better-off households.

The IFS, which produced its report with Barclays Capital and Barclays Wealth, said the UK "was very poorly placed" for recovery, after crawling out of recession in the final quarter of 2009.

The recovery was likely to be slower than hoped for by the British Treasury with annual growth averaging 2% over the next five years instead of the 3% pencilled in by official forecasts, the IFS said.

The British Treasury estimates that a record recession has permanently shrunk the output potential of the economy by 5% - although Barclays said this figure could be as high as 10%.

Its Green Budget comes after more dire warnings today from the National Institute for Economics and Social Research (NIESR).

NIESR said current belt-tightening plans from the UK government would not be enough to stem rising national debt by the middle of the decade.

It said public borrowing would be higher than forecast in 2013/14, while debt as a share of national output would continue to rise beyond 2015/16 - when the British Treasury expects it to fall back.

NIESR said: "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.

"Additional retrenchment will be needed, through either extra spending cuts or further tax increases or a mixture of both."

In his Pre-Budget Report, British Chancellor Alistair Darling pledged to cut the UK's soaring deficit over the next five years, but failed to set out detailed plans on how to achieve the target.

NIESR predicts net borrowing will be 6.8% of GDP in 2013/14 - 1.3% higher than official forecasts.

"(This) depends on tighter public spending than the government has currently planned, but still fails to meet the government's aspirations for deficit reduction," the forecaster warned.

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