BRITAIN faces years of painful adjustment as a result of the debt the government has taken on in the financial crisis, a report says.
Bankrupt Britain, written by City experts, says taxes will have to rise and the level of public spending will have to be cut by as much as £100 billion to put the government’s finances back into shape.
Its author, Malcolm Offord, a City fund manager with more than 20 years’ experience with Charterhouse, looked at the UK economy from the perspective of an investor considering putting money into a company.
Working with colleagues, he calculates that in the absence of government action, the national debt will balloon to more than 150% of gross domestic product over the next 10 years, compared with Labour’s “ceiling”, now breached, of 40%. The priority, he says, is to reverse the “profligate” spending that gave Britain an unacceptably big budget deficit at the start of the recession.
Reducing debt, the paper says, will require cutting the level of public spending by £60 billion by 2014 and £100 billion by 2020. Public spending is £623 billion this year, with a third going on social security.
Tax rises would also be needed, the paper says, focusing on an increase in the top rate of tax to 50%. But raising taxes too much would be self-defeating, hitting economic growth.
A poll for The Sunday Times today shows the Conservatives have maintained a 12-point lead over Labour as doubts about the government’s handling of the economic crisis grow. The poll details are bad for Gordon Brown. His approval rating has slumped 22 points since November, with only 31% of people thinking he has done a good job as prime minister.
Nearly half, 48%, fear that they or a member of their close family will lose their job, while slightly more think David Cameron and George Osborne would do a better job handling the crisis than Brown and Alistair Darling.
Other experts warn that the public finances are facing an immediate black hole, with the equivalent to tax rises of up to 12p in the pound on income tax needed to close the gap.
Martin Weale, director of the National Institute of Economic and Social Research, said: “We see a shortfall of £60 billion relative to [the chancellor’s] numbers.”
On Wednesday the Office for National Statistics will publish analysis of how the government’s finances performed during January.
Jonathan Loynes, chief European economist at Capital Economics, said: “We’re running out of adjectives to describe the state of the public finances, but suffice to say that things are still getting much worse.”
February 15, 2009
David Smith and Robert Watts
Source: The Sunday Times