Britain needs another £13bn to balance its books, says IFS

But more tax rises and budget cuts this year 'would put recovery in danger'
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The Independent Online

A future government was yesterday warned not to put Britain's tepid economic recovery at risk by imposing more tax rises and spending cuts during the coming year.

But the non-partisan Institute for Fiscal Studies said the current plans to cut Britain's yawning budget deficit after that do not go far enough.

It called for "more ambitious plans", suggesting that £13bn of extra cuts or tax hikes are needed by 2015-16 to reassure Britain's investors and stabilise the country's finances. The IFS also called for an independent body to oversee official forecasts for the public finances amid continued bouts of claim and counter-claim from politicians over figures.

The think-tank issued its "green budget" in association with Barclays following official figures which showed that Britain's economy continues to struggle with the first estimate of fourth-quarter GDP showing that the economy grew by just 0.1 per cent.

While that signalled the end of the recession, it was still far lower than economists had forecast and has led to a growing consensus that any further fiscal tightening this year would be folly.

However, the IFS said the Government needed to aim for a tightening of around 5 per cent of national income – or £70bn – over the five years to 2015-16 to deal with the hole in the country's public finances.

By contrast, the measures outlined by Alistair Darling, the Chancellor, in his pre-Budget report would amount to a fiscal tightening of £57bn in today's terms – just 4.1 per cent of national income – according to the institute.

The IFS said: "The need to reassure investors that the public finances will be repaired promptly and the possibility that the structural damage to the public finances from the financial crisis may be greater than the Treasury anticipates all suggest that it would be sensible to be somewhat more ambitious."

The report continued: "To make the planned repair job credible, the Government should spell out as clearly and promptly as possible how and when it intends to deliver the overall tightening. The plans would be more credible if an independent body was to produce or oversee official forecasts for the public finances."

The Chancellor is facing mounting criticism of his plans to address the public finances with a growing number of respected think-tanks and forecasters saying his plans do not go far enough. Yesterday's report from the IFS followed research from the National Institute of Economic and Social Research (Niesr), which also said that Mr Darling would fall short of his aim of halving the budget deficit as a proportion of national income by the 2013-14 financial year, despite the Government's pledge to enshrine that commitment in law.

The IFS did provide some comfort to the Treasury, saying that the short-term outlook for the public finances could actually prove to be better than expected, with trends so far this year suggesting "the Government will need to borrow about 0.7 per cent of national income or £10bn less in 2009-10 than it forecast in the pre-Budget report".

However, it continued: "If the economy evolves as the Treasury expects over the next few years we expect tax revenues to grow less quickly."

The report concluded that the overarching lesson of its analysis was that there is "enormous uncertainty" about the fiscal tightening needed and the overall health of Britain's economy. "Policymakers can best maintain their credibility not by insisting their forecasts will be correct but by explaining how they would respond if things turn out differently," it said.