Magazine article Public Finance

Economy Too Fragile for Early Public Spending Cuts, Says IFS

Magazine article Public Finance

Economy Too Fragile for Early Public Spending Cuts, Says IFS

Article excerpt

A consensus is building among politicians and economists that further cuts to public spending should be put on hold for a year.

The Institute for Fiscal Studies' annual Green Budget warned that more tax increases or public spending cuts this year would put economic recovery at risk, particularly after the UK came out of recession last month with just 0.1% growth.

But the think-tank also issued a caution to any incoming government that measures for fiscal tightening would need to be 'somewhat more ambitious' than those set out in December's Pre- Budget Report.

Politicians would need to find £13bn more in tax increases or spending cuts over the next five years than the £57bn already identified.

The IFS's warning came as the Tories backtracked on plans, if elected, to make immediate and deep public sector cuts. In a February 2 speech setting out the Conservatives' new economic model, shadow chancellor George ( )sborne limited his ambition to "making a start' on reducing spending this year.

The government has always argued for a more modest approach, claiming early cuts could plunge the economy into a double-dip recession. The Liberal Democrats agreed further cuts this year would be extremely dangerous', with Treasury spokesman Vince Cable adding: 'It is no surprise that the Tories are now desperately trying to play down their desire to do just that.'

Carl Emmerson. IFS deputy director, told Public Finance that making 'swingeing cuts' in 2010/11 would not be a good idea because the government had already begun reducing its fiscal support package (unlike most other G20 countries) and it would be difficult to make changes after the start of the financial year.

'If you cut heavily then you cut what you can, not what you should. It would be better to focus on April 2011 and come up with a sensible plan to re form public services, cut benefits and increase taxes - if that's what they [the Tories] want to do - so as to achieve the savings as best they can, rather than seek cheap pounds,' he said.

Emmerson added that if the Tories were worried about appearing not to have a credible plan, 'by announcing lots of pain for later years, you can be credible". The IFS criticised all parties for a lack of detail on how they would plug the public deficit, urging them to plan for different market scenarios.

Patrick Nolan, chief economist at the think-tank Reform, told PF that slashing public spending now or later was a 'false debate' since the bulk of cuts could not happen 'overnight' because they would require departmental and union negotiations. …

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