Backfiring cuts ‘might slow deficit reduction’
By politics.co.uk staff
Harsh spending cuts could prove counterproductive to dealing with the deficit by lowering Treasury tax revenues, a thinktank has warned.
The National Institute for Economic and Social Research (Niesr) suggested the economy could be hit by the plans contained in today’s comprehensive spending review, contrary to ministers’ expectations.
George Osborne has argued drastic spending cuts are necessary to restore credibility to Britain’s economy. The largest reductions in public spending since the Second World War could backfire, Niesr warned.
It suggested the government may only be able to reduce the deficit to 3.6% of GDP by 2014/15.
This falls far short of its 2.1% target, in today’s money approximately £28 billion.
Niesr suggested tax rises might have to be implemented to accelerate the process. The coalition’s spending cuts to tax rises ration is thought to be close to four to one.
“If this happens we advocate meeting the shortfall by raising direct taxes by an equivalent of two per cent of GDP,” a Niesr spokesperson said.
Its report suggested there was a one in five chance the UK economy would shrink in 2011.
