Page last updated at 12:54 GMT, Saturday, 28 February 2009

Cuts warning as public debt grows

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Refuse collection is one of many services provided by councils

The head of the commission that monitors spending by hospitals and councils has warned of "substantial" cuts in services after the recession.

Audit Commission chief Steve Bundred told the BBC the government will be forced to limit public expenditure to pay back its huge borrowing bill.

He advised public sector managers to prepare themselves for cuts now, rather than "slash and burn" later.

Britain's national debt is already at its highest proportion since 1978.

Steve Bundred, chief executive of the Audit Commission, said the government's planned tax rises may not be enough to pay back the debt in the worst case scenario.

It won't be until the other side of the election that we will start to see the first shoots of economic recovery but as soon as that happens the need to rebalance the public finances will be urgent
Steve Bundred

He said big cutbacks in public spending would be required, once the UK emerged from the recession.

"The measures that the government is taking to stimulate the economy may well be absolutely necessary but they involve unprecedented levels of public borrowing and public debt," he said.

"As soon as we see some signs of recovery, in order to maintain overseas confidence it is inevitable that the government will have to rebalance public finances and that will involve very substantial expenditure cuts."

"That won't be able to be achieved simply through the tax increases that have already been announced; it will require very substantial reductions in public spending.

"What I am saying to those who manage public services is that they need to see that coming and they need to prepare for that now."

He added the scale of the cuts would be "substantially" larger than the 30 billion spending cuts in the aftermath of the 1990s recession.

Managers needed to plan now to avoid the "slash and burn" reaction seen then and in the 1970s, he said.

Mr Bundred said he did not envisage the UK having to go "cap in hand" to the IMF for help but warned the country was not likely to see signs of recovery until the middle of next year.

Faltering banks

"It won't be until the other side of the election that we will start to see the first shoots of economic recovery but as soon as that happens the need to rebalance the public finances will be urgent," he said.

Figures published this month by the Office for National Statistics (ONS) indicate that Britain's national debt rose to 703.4bn in January, or 47.8% of gross domestic product.

It is the biggest proportion since 1978, when net debt was 49.1% of GDP.

The ONS said that figure would increase sharply if the money being pumped into Britain's faltering banks was taken into account.

In an article for The Times on Thursday, Mr Bundred warned that if borrowing pushed above 65% of GDP, there was a "distinct possibility" Britain could face "the Armageddon scenario most feared by the Treasury: that there will be insufficient lenders to match the planned level of borrowing".

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