CBI warning to Brown over £10bn 'hole' in public finances

The Government must cut £10bn off its spending plans over the next three years to prevent structural deficit in its public finances from undermining the UK economy, the CBI says today.

The employers' organisation says the cuts could be paid for by clamping down on public sector pay, reducing benefits fraud and leaving reserves untouched rather than reducing spending on frontline services.

In its submission ahead of the pre-Budget report later this autumn, the CBI warns that any tax increases would hit the economy and deter inward investors.

John Cridland, its deputy director general, said: "UK plc and its leaders feel they have gone as far as they can to accommodate tax increases that have weakened our international competitiveness position.

"The workable solution is for the Government to revisit its spending plans for 2007-08, and ease back on the dramatic rate of growth of public spending."

He said the "unworkable" solution of continued record deficits would lead to higher interest rates, larger interest payments bills and eventually tax increases that would hit already struggling consumers and businesses.

The CBI said it estimated there was a structural deficit in the public finances - one that cannot be explained by the economic cycle - of £10bn. It warned that unless this was tackled in the next two years then Chancellor Gordon Brown would risk breaking his "golden rule" to balance the books over the coming economic cycle. Asked what the CBI's reaction would be if the Government failed to respond, Mr Cridland said: "This is big. If we don't get the signal we are looking for, you will see the response that you would expect."

The CBI said the growth in total spending should be constrained over the next two years to £51.4bn - a 10 per cent rise - rather than the £61.4bn or 12 per cent laid out in the March Budget. "We are talking about constraining future growth in public spending, not cuts in public spending," Mr Cridland said.

In its proposal, the CBI said the £10bn savings could be found from a £6bn reduction in Whitehall's pay bill by holding average annual pay growth to 4.5 per cent, and shaving the public sector headcount by 1.25 per cent to match rates of absenteeism; £2.5bn saved from the benefits bill through action to reduce fraud and error; and £1.5bn by simply leaving unspent the "resource budget reserve".

Ian McCafferty, the CBI's chief economic adviser, denied that its proposals, which were based on targets for reducing future spending rather than axing named programmes, were "flaky". He said: "We have sufficient confidence that in all the areas progress can be made. Too much of the growth in public spending and extra taxes that businesses have provided have gone on wage growth that has not delivered a competitive advantage."

He added: "If the private sector can keep to 4.5 per cent pay growth there's no good reason why government cannot move back to 4.5 per cent."

Spending commitments vital for the economy's long-term prospects - on education and skills, transport, science, technology and innovation, and support services for trade and businesses - should be protected.

Looking ahead, the CBI called for the £50bn increases in overall business taxation to be put into reverse, with a cut in the tax burden before 2010. Mr McCafferty, said: "There must be absolutely no further increases in the tax or regulatory burden on companies. If the Government truly recognises the fundamental role business plays in generating wealth for the nation, it must put previous increases into reverse before the end of this Parliament."

It called on ministers to press on with corporation tax reform, and strongly criticised tax measures being introduced under an "anti-avoidance" banner by the Treasury. It also proposed affordable measures to promote enterprise and innovation that the Chancellor could introduce as early as next year.