Treasury must protect growth, says CBI study

Business lobby highlights dangers of cuts as economists predict global slowdown

The Confederation of British Industry (CBI) will today urge the Government to protect economic growth in the forthcoming spending review, which is likely to result in the most savage cuts for a generation.

Amid mounting fears that the recovery is stalling and Britain could face a double-dip downturn, the CBI will say that ministers must prevent this by protecting investment in areas that foster growth.

The warning comes as a respected think-tank, the Centre for Economics and Business Research, prepares to downgrade its forecasts for the world economy today. It will reduce its expectation for global GDP growth in 2011 to 3.4 per cent from the 4.1 per cent it predicted three months ago, blaming weakness in the US economy.

On Friday, the Organisation for Economic Co-operation and Development also gave warning that the world economy was proving weaker than expected in the second half of the year and that governments might need to consider putting off austerity measures if the weakness continues.

The CBI's concern is expressed in its submission to the Treasury ahead of next month's spending review. The Government announced in the Budget that it would make £32bn of annual cuts by 2014-15 to bring Britain's soaring public-sector deficit under control.

The CBI agrees that spending must be limited to "avoid major tax rises that would damage our economy and undermine competitiveness". But it says investments in areas that facilitate growth must be protected if the economy is not to be tipped into another tailspin. These include continuing investment in Britain's creaking infrastructure, research and development, and human capital through education and skills training.

"The Government must protect investment in areas that do most to foster economic growth while making savings by re-engineering public- service delivery, reforming public-sector pensions and reducing spending in other areas," the CBI will say.

John Cridland, its deputy director-general, said yesterday: "The Government rightly decided to limit public spending. The alternative would have been tax rises and other consequences that would have damaged the economy for years to come. Cutting spending means tough choices.

"We think the need for economic growth, not the noise of the loudest voice, should determine where cuts are made. The Government must improve the efficiency of public services and focus the limited public money available on areas that do most to galvanise growth."

The CBI will place particular emphasis on what it sees as the importance of investing in transport infrastructure, because "this offers high returns and will play a crucial role in boosting domestic and international trade". It will call on ministers to breakdown what it says are barriers to private-sector investment in energy and communications infrastructure.

The CBI will also call for public-sector capital investment to be returned to 2.25 per cent of GDP as soon as possible, for existing transport assets to be maintained, and for work on London's Crossrail project and upgrades to the London Underground network to continue. It believes savings on existing transport spending can be made by reducing the concessionary fares budget and the number of Highways Agency contracts. The CBI also wants to see more investment in "knowledge assets" and the co-ordination of research and development across the Government.

A source at the Treasury said: "We welcome the CBI's submission, which shows that businesses on the front line of the economic recovery support the Government's action to deal decisively with the unprecedented budget deficit in order to avoid damage to the economy that would last for years to come.

"The plans announced by the Government will support growth and jobs while rebalancing the economy away from an over-reliance on public spending through targeted support and no further cuts in capital spending."

The Government has argued that the Office for Budget Responsibility expects stronger growth and rising employment. The source added: "Not taking action to deal with the deficit is the biggest threat to these prospects."