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UK must cut state spending

BRITAIN needs a more radical programme of spending cuts to slash the budget deficit over the next few years, a leading think-tank urged yesterday.

The Institute for Fiscal Studies (IFS) called for an extra £13bn worth of tightening by 2015-16 – or five per cent of GDP. Doing more of the required consolidation sooner would aid credibility and add room for manoeuvre if things turn out worse than the pre-Budget Report forecasts, the IFS said. But IFS director Robert Chote warned that enough tightening was already being planned for
2010-11.

Produced in conjuction with Barclays, the IFS’s annual recommendations for the public finances said that the budget deficit – expected to rise to 12.6 per cent this tax year – will fall to 2.9 per cent in 2014–15 while public sector net debt hits 76 per cent. Under these plans, cuts to non-protected departmental budgets would have to be much deeper than previously thought – implying annual real cuts of 6.7 per cent a year in both 2011-12 and 2012-13 to departments other than the police, NHS and education.

Mike Dicks, chief economist at Barclays Wealth, warned that the recent crisis had done more damage to the level of potential output than estimated by the Treasury. The government has predicted the hit to be in the order of five per cent, Barclays thinks it is more likely to be about 7.5 per cent.

Post-crisis, potential annual growth in the UK will only reach 1.75 per cent by 2015, a whole percentage point less than what the Treasury thinks the British economy is capable of from 2011 onwards.