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UK Deficit Reduction Plans In Tatters, Report Claims

by Robert Lee, Tax-News.com, London

16 November 2012


The UK government will need to implement GBP48bn (USD76bn) in additional spending cuts or tax rises if it hopes to get deficit reduction plans back on track, new analysis has claimed.

The analysis, from the Social Market Foundation (SMF) and the Royal Society of Arts (RSA), anticipates a significantly larger black hole in the public finances than previously thought.

The SMF's economists concluded that the government is likely to miss its fiscal target to eliminate the structural deficit within five years unless deeper cuts are made in the three years to 2017/18. In particular, the paper warns of the pain likely to be laid out in the next planned spending review. As it points out, the fine print of Chancellor George Osborne's most recent Budget implied that GBP26bn of new cuts would be required beyond 2014. A deteriorating economic situation will necessitate a further GBP22bn of cuts if the government hopes to achieve its plans, the paper adds.

This substantially revised figure is attributed to an overshoot in government borrowing and differences between Office of Budget Responsibility (OBR) and Budget projections on the economy's potential to bounce back from recession. The result will be a 1.1% larger-than-expected structural deficit for the current financial year. According to the SMF, this outlook means real terms cuts to departmental spending between 2015 and 2018 of 3.7% each year to achieve the plans set out in Budget 2012. This is far faster than the pace of cuts over the current spending review of 2.3% per year. The SMF calculates that these extra cuts from 2015 will result in some unprotected government departments, including the Home Office and Ministry of Justice, becoming over 40% smaller in 2018 than they were at the start of the decade.

TAGS: tax | economics | fiscal policy | gross domestic product (GDP) | budget | United Kingdom

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