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| Treasury rejects IFS thinktank's suggestion of £10bn budget tax cut | Treasury rejects IFS thinktank's suggestion of £10bn budget tax cut |
| (about 7 hours later) | |
| The Treasury is insisting that it will stick to its tough austerity plan despite being told by Britain's leading financial thinktank on Wednesday that a £10bn budget giveaway would be possible without running the risk of forcing the the Bank of England to raise interest rates. | |
| Warning that Britain was on course for a double-dip recession this winter, the Institute for Fiscal Studies said: "The case for a significant short-term fiscal stimulus to boost the economy is stronger than it was a year ago." | Warning that Britain was on course for a double-dip recession this winter, the Institute for Fiscal Studies said: "The case for a significant short-term fiscal stimulus to boost the economy is stronger than it was a year ago." |
| At the time of the 2011 budget, the IFS was against any let-up in George Osborne's deficit reduction plan, but on Wednesday the thinktank's director, Paul Johnson, said he was now "sitting firmly on the fence". | At the time of the 2011 budget, the IFS was against any let-up in George Osborne's deficit reduction plan, but on Wednesday the thinktank's director, Paul Johnson, said he was now "sitting firmly on the fence". |
| Johnson said there was still a need to repair the fiscal damage caused to the economy by the deep recession of 2008-09, but that he would not be critical if the chancellor announced a package of tax cuts or increased spending worth £10bn on budget day, 21 March. The IFS director added, however, that £10bn of fiscal easing would only be a small boost to the economy, while a more aggressive loosening – worth £15bn or more – would run the risk of unsettling the financial markets. | Johnson said there was still a need to repair the fiscal damage caused to the economy by the deep recession of 2008-09, but that he would not be critical if the chancellor announced a package of tax cuts or increased spending worth £10bn on budget day, 21 March. The IFS director added, however, that £10bn of fiscal easing would only be a small boost to the economy, while a more aggressive loosening – worth £15bn or more – would run the risk of unsettling the financial markets. |
| A Treasury spokesman said: "The IFS say that tackling the deficit is necessary; that without the government's deficit plan borrowing would be much higher; and that any fiscal stimulus big enough to make a difference would undermine investor confidence and so risk higher interest rates." | A Treasury spokesman said: "The IFS say that tackling the deficit is necessary; that without the government's deficit plan borrowing would be much higher; and that any fiscal stimulus big enough to make a difference would undermine investor confidence and so risk higher interest rates." |
| Osborne believes that it is the Bank of England that should be responsible for boosting economic activity in the short term, and that the credibility of the Treasury's deficit-reduction programme allows the Bank's monetary policy committee to keep the interest rate, which is currently 0.5%, lower than it would otherwise have to be. | Osborne believes that it is the Bank of England that should be responsible for boosting economic activity in the short term, and that the credibility of the Treasury's deficit-reduction programme allows the Bank's monetary policy committee to keep the interest rate, which is currently 0.5%, lower than it would otherwise have to be. |
| But Rachel Reeves, Labour's shadow chief secretary to the Treasury, said: "The independent IFS is right to say that the case for short-term action on jobs and growth, for example through the temporary tax cuts Labour has been calling for, is now stronger – and will get stronger still if the eurozone crisis deepens. | But Rachel Reeves, Labour's shadow chief secretary to the Treasury, said: "The independent IFS is right to say that the case for short-term action on jobs and growth, for example through the temporary tax cuts Labour has been calling for, is now stronger – and will get stronger still if the eurozone crisis deepens. |
| "But rather than waiting for things to get even worse, George Osborne should take urgent action in next month's budget. Years of slow growth and high unemployment are not just bad for families and for the deficit, but also risk permanent damage to our economy. | "But rather than waiting for things to get even worse, George Osborne should take urgent action in next month's budget. Years of slow growth and high unemployment are not just bad for families and for the deficit, but also risk permanent damage to our economy. |
| "We agree with the IFS that the best form of stimulus would be a temporary cut in VAT, a cut in national insurance contributions for employers and additional infrastructure spending, which are three of the five elements in Labour's plan for jobs and growth." | "We agree with the IFS that the best form of stimulus would be a temporary cut in VAT, a cut in national insurance contributions for employers and additional infrastructure spending, which are three of the five elements in Labour's plan for jobs and growth." |
| In its annual "green budget", which analyses the state of the economy and the public finances, the IFS said lower-than-forecast Whitehall spending would mean that the chancellor would need to borrow £124bn this year, £3bn less than he estimated in the autumn statement in November 2011. By 2016-17, borrowing will be £9bn lower, providing the chancellor with more fiscal flexibility at the time of the 2015 election. | In its annual "green budget", which analyses the state of the economy and the public finances, the IFS said lower-than-forecast Whitehall spending would mean that the chancellor would need to borrow £124bn this year, £3bn less than he estimated in the autumn statement in November 2011. By 2016-17, borrowing will be £9bn lower, providing the chancellor with more fiscal flexibility at the time of the 2015 election. |
| The IFS warned, however, that work on repairing the £114bn "black hole" in the government's finances had only just begun. It said that 75% of the austerity programme was still to come, including 88% of the benefit cuts and 94% of the reductions in departmental spending. "The sheer scale of the cuts is daunting and almost without historical or international precedent", the IFS said. | The IFS warned, however, that work on repairing the £114bn "black hole" in the government's finances had only just begun. It said that 75% of the austerity programme was still to come, including 88% of the benefit cuts and 94% of the reductions in departmental spending. "The sheer scale of the cuts is daunting and almost without historical or international precedent", the IFS said. |
| Oxford Economics, which produces forecasts for the green budget, said the economy would grow by just 0.3% in 2012, lower than the official estimate of 0.7% made by the independent Office for Budget Responsibility. | Oxford Economics, which produces forecasts for the green budget, said the economy would grow by just 0.3% in 2012, lower than the official estimate of 0.7% made by the independent Office for Budget Responsibility. |
| It added that risks were heavily skewed to the downside, and predicted that a breakup of the eurozone involving five countries would send the UK spiralling back into a deep recession that would see output fall in both 2012 and 2013. | It added that risks were heavily skewed to the downside, and predicted that a breakup of the eurozone involving five countries would send the UK spiralling back into a deep recession that would see output fall in both 2012 and 2013. |
| The IFS said it doubted whether the chancellor would implement a "significant net giveaway" in the budget next month unless the economy was in much worse shape than it had been at the time of last November's autumn statement. It added that Osborne could recycle the £3bn under-spending by Whitehall departments during 2011-12 into higher infrastructure investment in 2012-13. "This would represent a modest fiscal loosening that could be easily explained to the markets and therefore would be relatively risk-free," the IFS said. | The IFS said it doubted whether the chancellor would implement a "significant net giveaway" in the budget next month unless the economy was in much worse shape than it had been at the time of last November's autumn statement. It added that Osborne could recycle the £3bn under-spending by Whitehall departments during 2011-12 into higher infrastructure investment in 2012-13. "This would represent a modest fiscal loosening that could be easily explained to the markets and therefore would be relatively risk-free," the IFS said. |