THE coalition must protect confidence in the UK by delivering a reduction in the deficit, the respected Institute for Fiscal Studies (IFS) said yesterday.
Loosening fiscal policy “risks undermining investor confidence,” the thinktank warned in its green budget.
“Having set out his fiscal consolidation plan, it is important that chancellor Osborne resist the temptation to engage in any significant net giveaway in the budget,” the IFS said.
Forecasting that Osborne would beat his deficit target for this financial year by £2.9bn, the IFS said he should “bank” any shortfall in borrowing to guard against shocks to the economy.
Slower growth in the economy would see the government still drawing an annual public deficit of 0.4 per cent of GDP in 2015-16, it said. Simon Hayes of Barclays Capital, who contributed to the report, says the recovery will be more sluggish than the government expects.
The report expects a deficit of £145.6bn for 2010-11: “The large government deficit and high reliance on debt are sources of vulnerability,” it warns.
“Past calm is no guarantee of future stability,” Hayes added, citing a sudden loss of confidence in Spain from May last year. Yet the consolidation plan soothed concerns for the UK.
“Financial markets seem to have reacted positively to the plan,” he said. “The interest rate differential between UK and German government bonds has declined since the general election, in contrast to Spain.”
Labour pounced on the report’s suggestion that the chancellor may have to adapt cuts to respond to unexpected economic developments. “It’s time the chancellor got himself a plan B,” shadow treasury secretary Angela Eagle said.