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Government must tighten finances by an extra 26bn

THE government could balance its books by the year 2015/6 via additional fiscal tightening measures equivalent to &pound;26bn in the next three years, a report by PricewaterhouseCoopers will claim today.<br /><br />The report will say the government has a responsibility to put the public finances back on a sustainable footing by 2015/6, two years ahead of the government&rsquo;s Budget schedule. By that time, PwC estimates it will have to close a fiscal gap of around three per cent of GDP.<br /><br />The firm said policymakers should aim to implement fiscal tightening of around 1.8 per cent of GDP &ndash; or around &pound;26bn &ndash; by 2013/14, over and above the plans already included in the Budget.<br /><br />&ldquo;Irrespective of who wins the next general election, turning the tide of debt through a prioritised approach to taxation and spending will be critical to steering the economy back to sustainable growth in the longer term,&rdquo; said John Hawksworth, head of macroeconomics at PwC. &ldquo;Failing to fix the public finances, by contrast, would risk persistently high interest rates, a more volatile currency and a less certain environment for business.&rdquo;<br /><br />The report outlined possible tax and spending options to achieve that goal, including an additional rise in taxes building up to around &pound;26bn per annum, alongside real departmental public spending cuts of around nine per cent in the three years to 2013/14. Another option would be sharing the burden of the fiscal tightening evenly between tax rises (&pound;13bn) and real public spending cuts of around 13 per cent, PwC said.<br /><br />But it added that while the government could also avoid tax rises altogether by reducing departmental spending by around 17 per cent over the period, &ldquo;the scale of public spending restraint involved would pose a major challenge&rdquo;.<br />