Green budget from Institute for Fiscal Studies argues chancellor cannot afford to ease Britain's fiscal pain
George Osborne should resist the temptation for lavish handouts in next month's Budget and stick to his deficit-cutting strategy, the respected Institute for Fiscal Studies (IFS) said today.
But in its annual Green Budget, the tax thinktank urged the chancellor to draw up alternative plans, in case the deep cuts set out in last autumn's spending review are jeopardised by a weaker-than-expected recovery or by problems of implementation in Whitehall.
The IFS said the government was on course to borrow slightly less this year than predicted by the Office for Budget Responsibility (OBR), the spending watchdog created by the chancellor after last year's general election.
But the IFS still expected the UK to be in the red by �145.6bn in the 2010-11 financial year, just �2.9bn lower than the budget deficit pencilled in by the OBR.
"Having set out his fiscal consolidation plan, it is important that chancellor George Osborne resist the temptation to engage in any significant net giveaway in the budget," the IFS said in its annual analysis, produced jointly with Barclays Capital and Barclays Wealth.
The thinktank said the benefits of any tax giveaways in the March 23 Budget could be wiped out by a rise in interest rates by the Bank of England, which has kept borrowing costs at their record low of 0.5% partly to offset the impact of the fiscal squeeze.
"While last week's growth figures were disappointing, any fiscal loosening aimed at helping the economy could be ineffective if it prompts an offsetting monetary tightening, and risks undermining investor confidence that the remainder of the fiscal consolidation plan, in which the chancellor has set such store, will be delivered," it said.
David Cameron seized on the IFS's analysis at prime minister's questions in the House of Commons, castigating the shadow chancellor, Ed Balls, for "complete deficit denial".
Balls has called for a less aggressive approach to tackling the deficit, but Cameron pointed to the IFS's finding that Britain had the second-highest structural deficit among 28 major economies, beaten only by Ireland. He said: "I have to say, you start in opposition from a position of complete deficit denial. You will never be taken seriously again."
Labour instead pointed to the IFS's insistence that the government should explain how it would respond in the event of an unexpected downturn in the economy, saying it supported IFS calls for a "plan B".
Under the economic forecast drawn up for the report by Barclays, which projects a weaker recovery than the OBR is expecting, the chancellor would miss by �6bn his target of eliminating the underlying deficit by the end of this parliament.
The IFS's deputy director, Carl Emmerson, said: "The chancellor would be best advised to draw up, and tell us about, exactly what he would do if the world doesn't evolve as he expects ... That would seem to us to be more credible than a fixed plan."
Simon Hayes, chief UK economist at Barclays Capital and co-author of the report, agreed, saying: "It's not a sign of weakness; it's not an admission of defeat. It's just sensible contingency planning."
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The shadow chief secretary to the Treasury, Angela Eagle, said: "The IFS report is right to warn about the serious risks to growth that our economy faces, and that without growth George Osborne won't meet his own deficit reduction targets. It is time he heeded those warnings and got himself a plan B."
The IFS said the years 2011-16 were set to be the "tightest five-year period for public spending since at least the second world war", with only Ireland and Iceland out of 29 leading industrial countries expected to deliver sharper falls in spending.
Source: http://www.guardian.co.uk/business/2011/feb/02/george-osborne-resist-budget-giveaway-ifs
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