Lib-Cons' Emergency Budget Will Have to Raise Taxes; ECONOMICS ANALYSIS

Article excerpt

Byline: Hugo Duncan

THE waiting is nearly over. The emergency Budget on June 22 should finally outline a credible plan to plug the black hole in the nation's finances.

One thing is certain -- the spending cuts and tax rises proposed by George Osborne, the new Chancellor of the Exchequer, will be very painful.

Anything less risks the wrath of the financial markets and a fresh wave of largely unwarranted comparisons with crisis-torn Greece and other debt-ridden countries in southern Europe.

Osborne is only too aware of this. As are the Bank of England and the Treasury.

Even the Liberal Democrats, who initially sided with Labour in opposing Conservative plans to wield the axe immediately, are now convinced.

So what will be in next month's emergency Budget? The Lib-Con coalition document agrees to "a significantly accelerated reduction in the structural deficit over the course of a Parliament, with the main burden of deficit reduction borne by reduced spending rather than increased taxes".

Osborne will confirm plans to start cutting the deficit this year through [pounds sterling]6 billion efficiency savings, as proposed in the Tory manifesto but opposed by Labour. Among other things, it will involve slashing travel budgets and IT costs. With the backing of Bank Governor Mervyn King, who last week approved the coalition's "strong and powerful" deficit reduction plans, Osborne will also look to make deeper cuts than Labour proposed in its last Budget in March. George Buckley, chief UK economist at Deutsche Bank, reckons Osborne wants to cut the deficit from 11.5% of gross domestic product this year to 3% in 2014-15. Labour proposed to bring it down to 4%.

Achieving this will not be easy and Osborne must decide how to split the burden between spending cuts and tax rises. Before the election, the Tories favoured a 4:1 ratio of spending cuts and tax increases while the Lib-Dems preferred 5:2, so somewhere in the middle seems logical. The reality, however, will be somewhat different, with tax rises taking much more of the burden.

The fiscal squeeze in the early Nineties under the last Conservative government saw a 50:50 split between tax increases and spending cuts. …