ITEM: cuts won't cause double-dip

THE UK faces a slow economic recovery but fears of a double dip recession are overdone, one of the UK’s top forecasters will say today.

The Ernst & Young Item Club – which uses the Treasury’s own economic model to make its predictions – also suggests that far from hurting the economy, Wednesday’s Comprehensive Spending Review will stimulate activity with investment to grow nine per cent next year. The news will come as a boost to Chancellor George Osborne, who yesterday vowed to keep to his schedule for cutting the deficit.

The Item Club report says current uncertainty over where Osborne’s axe will fall has led businesses to hoard cash. However, once the scale of spending cuts is known, companies will start spending.

In a further boost to Osborne, 35 business leaders will today urge him not to slow down the cuts. They include Andy Bond, chairman of Asda, Gordon Frazer, boss of Microsoft UK, Ian Livingston, boss of BT, and Charles Dunstone, chairman of Carphone Warehouse.

Peter Spencer, Item’s economic advisor, said GDP growth would be 1.4 per cent this year and 2.2 per cent in 2011. Spencer said exports were likely to pick up from mid-2001. Inflation would also begin to ease towards the second half of 2011 and come below target from January 2012, while the Bank of England’s base rate was unlikely to change. But wage growth remains below 2 per cent, with real income to fall one per cent next year.

Some departments will suffer much more than others. The Ministry of Defence will see real cuts of 8 per cent, with troop numbers cut to 95,000. The NHS will see its funding go up in real terms, as will foreign aid. The schools budget appears to have been largely protected. It is believed that the Ministry of Justice could lose up to 30 per cent, hitting courts and prisons, while the Home Office will also be slashed.

But yesterday Osborne confirmed funding of major infrastructure projects such as Crossrail – giving Boris Johnson a boost – Mersey Gateway, the science project Diamond synchrotron and universal broadband.

He also announced plans for a three strikes rule, which would mean cheats would be denied benefits for three years following three convictions for benefit fraud. There are also likely to be other large cuts to welfare and social spending.

The Transport Department is also likely to be hit by large cuts. There is talk of massive, 40 per cent rises in train fares over the next few years. Other departments such as Energy, the Foreign Office and Culture will be slashed.