City expects budget cuts

CITY economists have broadly backed the chancellor’s plans to launch what could be the sharpest fiscal tightening in Britain’s post-war history but warned that the squeeze could harm still-feeble growth.

Despite the improving fiscal trend, George Osborne is expected to introduce additional tightening measures in his first Budget tomorrow to put the public finances onto a more sustainable footing. Analysts agree that it is important for the new government to deliver a credible package that will keep the financial markets and ratings agencies at bay.

Although some, such as Capital Economics’ Jonathan Loynes, think that spending cuts will hamper growth prospects, there is little talk of Britain plunging back into recession.

Instead, the vast majority welcome the coalition government’s attempts to rein in the public finances.

Barclays Capital’s Simon Hayes envisages policies that would aim to cut the structural deficit by 8 per cent of GDP over the parliamentary term. This implies tax rises of about £24bn and spending cuts worth £94bn.

“Such a plan would be viewed positively by financial markets and would go some way towards assuaging the concerns expressed by rating agencies,” he said.

Citigroup’s Michael Saunders has pencilled in an immediate £10bn tax hike – most likely through a higher Vat rate. Although he admitted that growth would consequently not be spectacular, improving fiscal trends should make the recovery far more sustainable than many currently believe.

However, Commerzbank’s Peter Dixon points out that multi-year departmental spending plans will limit the chancellor’s room for manoeuvre tomorrow.