Page last updated at 11:49 GMT, Saturday, 21 March 2009

Government borrowing 'to swell'

10 notes
The government is having to borrow heavily

The government has limited scope to implement its planned stimulus package as borrowing soars, according to a key economic think-tank.

The Ernst & Young Item club forecasts that net borrowing will rise to £180bn in the forthcoming tax year and will exceed the Chancellor's own prediction.

It said that public finances were deteriorating "at an alarming rate".

Shadow chancellor George Osborne called it "the worst fiscal mess any British government has created in peacetime".

Liberal Democrat Treasury spokesman Vince Cable said the government's public finance estimates were "so far removed from reality that no one is likely to take them seriously any more".

The Item club also called for a temporary cut in national insurance contributions to encourage businesses to hire staff.

The chancellor must provide some credible forecasts for the public finances
Peter Spencer, Item club

On Thursday, the IMF said that the UK would have to borrow 11% of national income to battle the financial crisis - the highest of the G7 nations.

That figure was overly optimistic, according to the Item club. It forecasts borrowing to stand at 12.6% of GDP next year and that the UK would be running deficits over the next decade.

The club, which uses similar methodology as the Treasury forecasters, said that predictions by the chancellor, Alistair Darling, in last November's pre-budget report had been overtaken by events.

Total borrowing over the next five years would be £270bn higher than anticipated, it said.

The forecasters blamed the parlous public finances on falling tax revenues as a result of lower consumer spending and rising unemployment.

"The chancellor must provide some credible forecasts for the public finances and present an unambiguous medium-term plan for restoring them to health, " said Peter Spencer, chief economic advisor to the Item club.

Mr Osborne told BBC Radio 4's Today programme: "One of the problems at the moment is that tax receipts have collapsed but we also need to look at the spending side of the organisation.

'Rampant expenditure'

"Proposals put forward by the government on spending restraint aren't sufficient and even on their very optimistic forecasts - which look hopelessly wrong now - that would not bring the budget back under control.

"We are deadly serious about tackling rampant public expenditure, getting public expenditure under control, making sure this country lives within its means.

"We will be tough, we will take the necessary decisions and as we approach this general election, and as full scale of the devastation that the Labour government has wrought to our economy becomes clear, we will be more and more specific about the measures that we need to take."

Mr Osborne added that he wanted to create a culture in Whitehall where civil servants looked for value for money and to reform public services to get "more bang for your buck".

Mr Cable said the government had to support the economy during the recession and so it "would not be sensible" to raise taxes or cut public spending in the short term.

"But it does mean there will have to be strong discipline once the recession has passed," he said.

He said the weakness of the public finances meant there would have to be more emphasis on monetary policy.

"The creation of credit through quantitative easing is necessary but contains dangers if it were to get out of control," he added.

The Bank of England has started trying to increase the money supply by £75bn through quantitative easing - effectively creating money by buying up assets in the form of government bonds.

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