Page last updated at 16:16 GMT, Wednesday, 3 February 2010

Economists call for tighter budget squeeze

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Weak consumer spending will hinder growth, says the IFS

An extra £13bn in tax rises or spending cuts is needed by 2015-16, according to a respected think tank.

The Institute for Fiscal Studies (IFS) said the funds are needed for the government to reassure investors it is committed to repairing public finances.

However, it cautions against any extra budget tightening in 2010, because of the fragile state of the economy

The IFS predicts economic growth will be 2% a year over the next five years, lower than the Treasury's suggested 3%.

It is also forecasting that weak consumer spending and a muted rebound in capital investment will hinder economic growth.

The big message from the IFS is that the future performance of the economy is going to have a far greater impact on the public finances than the political affiliation of the party in power
Stephanie Flanders, BBC economics editor

Another report, by the National Institute of Economic and Social Research (NIESR) said tighter spending controls will be needed if the government is to halve the budget deficit over the next four years.

It said the current government spending plans would not go far enough.

"Plans for fiscal consolidation will not be sufficient to start bringing down net public debt as a share of GDP by the middle of this decade, as the Treasury expects. Instead it will carry on rising," the report said.

"Additional retrenchment will be needed, through either extra spending cuts or further tax increases or a mixture of both."

Unemployment

According to the IFS's "Green Budget", whoever forms the government after the general election will need to improve public finances by a greater amount than that set out in the pre-Budget report.

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NIESR predicts unemployment could reach almost 3 million in 2011

It says the government should aim for fiscal tightening of 5% of national income, or £70bn, by 2015-16, as opposed to the 4.1% planned.

The report said the Treasury has underestimated the structural damage to public finances and that investors need to be reassured that they will be repaired promptly.

The BBC's economics editor Stephanie Flanders said the big message from the IFS was that the future performance of the economy was going to have a far greater impact on the public finances than the political affiliation of the party in power.

In its report NIESR predicted unemployment would peak at 2.9 million in the third quarter of 2011.

"Unemployment has risen by less than seemed likely given the severity of the downturn. But employment has fallen by more than expected once we take account of the adjustment of real wages and average hours worked," said NIESR.

The UK economy emerged from recession in the last three months of 2009, with weaker-than-expected growth of 0.1%.

NIESR said growth should accelerate in the coming months, with the economy expanding by 1.1% in 2010 and 2.0% in 2011.

However, it warned the recovery would be dependent on exports, with consumer spending likely to fall by 0.3% this year.



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