Labour Under Pressure As Europe Tells Britain: Cut Deficit Faster, Deeper

(Guardian) – LABOUR’S STRATEGY for controlling Britain’s spending was tonight under fresh challenge when it emerged that the European commission is preparing to demand tougher government action to rein in the UK’s record peacetime deficit. In findings which were seized upon by the Conservatives, Brussels warned that the current plans for repairing the black hole in the budget left by a deep and long recession needed to be more ambitious.

“A credible time frame for restoring public finances to a sustainable position requires additional fiscal tightening measures beyond those currently planned,” said a draft report, due to be approved by the commission , but leaked to the news agency Reuters. It added: “The overall conclusion is that the fiscal strategy in the convergence programme is not sufficiently ambitious and needs to be significantly reinforced.”

The findings are likely to stoke what has become the pivotal political row between the two main parties ahead of next week’s budget, and the general election campaign that will follow.

They will add to pressure on the prime minister at a time when Labour’s new-year resurgence appears to have stalled. An ICM poll for the Guardian tomorrow shows the gap between the parties has increased, to a nine-point Conservative lead over Labour. It also suggests that Brown’s personal unpopularity with the electorate remains a drag on the party’s standing, even though the Tories have been beset by their own problems in recent weeks.

The European commission is set to warn that on current plans the UK will not meet the 2014-15 deadline for reducing the budget deficit to below 3% of national output. Chancellor Alistair Darling’s proposals envisage the gap between spending and taxes being reduced to 4.7% of gross domestic product, but the commission said even this target might be missed as a result of weaker growth than the Treasury is expecting.

The assessment provided some support for Darling ahead of next week’s budget, when it said the plans for the coming fiscal year were adequate, but the findings will increase speculation in the markets that the election will be quickly followed by fresh measures to cut spending and raise taxes, whatever the result.

The shadow chancellor, George Osborne, claimed the report was a heavy blow for the prime minister. “The Conservatives have been arguing that we need to reduce our record budget deficit more quickly to support the recovery. Our argument is backed by credit rating agencies, business leaders, international investors and now the European commission. That is why we need a change of government to restore confidence in our economy at home and abroad.”

A Treasury spokesman said the government was committed to halving the deficit over four years and that such a cut would be the sharpest among the Group of Seven industrialised countries. “The chancellor has taken a judgment on the appropriate pace of adjustment in 2010-11 and beyond,” the spokesman said.

This takes into account “the uncertainty around prospects for the public finances given the exceptional nature and strength of the global downturn, the need to support the economy through the early stages of the recovery, and the need to deliver sustainable public finances,” he said.

While tomorrow’s poll will be dispiriting for Labour, it is also clear that voters are not convinced by the Conservatives.

The survey shows only 18% think Britain would be best served by a strong Labour win. And though almost a third think a clear Conservative victory would be best, 44% want a hung parliament in which the government works with smaller parties such as the Liberal Democrats.

The Tory leader is 11 points ahead of Gordon Brown as the man voters want to win, and 20 points ahead as the leader best campaigning for “the votes of people like you”. He has a 14-point lead as the most competent for prime minister, and an 11-point lead as the man most likely to lead Britain in the right direction.

The figures call into question recent excitement about a Labour fight back. The Tories, at 40%, are up three on the February Guardian poll, and up two on another more recent ICM poll last weekend. The Liberal Democrats are on 20%, unchanged since the last Guardian/ICM poll, while support for other parties is on 9%. Conservative support has been within three points of 40% in all ICM polls since October.

Brown is likely to try to stay on even if he loses power, but a close result could mean there might have to be another election this year. Questioned on BBC Radio 4’s Woman’s Hour, Brown said: “I will keep going. I will keep going because I want a majority.”

Asked whether he owed it to the Labour party to stand aside if he did not secure a majority, he said: “I think I owe it to people to continue and complete the work we’ve started of taking this country out of the most difficult global financial recession.”

ICM Research interviewed a random sample of 1,002 adults by telephone on 12-14 March 2010. Interviews were conducted across the country and the results have been weighted to the profile of all adults. ICM is a member of the British Polling Council and abides by its rules.

Advertisements

Britain Posts First January Deficit Since Records Began

(Telegraph) – BRITAIN REPORTED its first budget deficit for January since records began as government spending rose and tax receipts fell sharply.

The Office for National Statistics said today that spending by the Government had exceeded its income by £4.3bn.

It is first time the Government has had to borrow in a January since records began in 1993. Economists had expected a surplus of around £1bn.

The figures reflected the impact of the economic downturn on the UK’s finances as tax revenues slumped while spending grew because of measures such as the jobseeker’s allowance.

It will renew pressure on the Government to set out plans to ease the burden on public finances, with many predicting a future of tax rises and spending cuts.

Andrew Goodwin, senior economic advisor to Ernst & Young Item Club, said: “These are pretty ghastly figures and come as somewhat of a surprise given the smaller overshoots of the past couple of months.

“January usually yields a healthy surplus due to receipts from corporation tax and even in the current climate it is surprising to see the government rack up a deficit.”

The pound fell after the release.

The ONS said spending was £4.4bn higher than in January 2009, while receipts were down £4.2bn.

Government receipts stood at £50.5bn as income tax fell 19pc to £19.4bn compared with January last year.

VAT income grew 16pc year-on-year after the rate returned to 17.5pc at the end of the Government’s temporary move to help the economy.

Spending grew to £49.5bn in the month, with layout on social benefits up 3pc at £14bn in January.

The UK’s net debt hit £848.5bn, which is equivalent to 59.9pc of the country’s annual output – the highest proportion for a January since the 1974 financial year.

David Kern, chief economist at the British Chambers of Commerce, said the worse-than-expected January figures further emphasised the dangers facing Britain’s international credit rating.

“The deficit this year reinforces the need for credible and specific deficit-cutting measures in next month’s Budget,” he said.

“As well as explicitly spelling out its medium-term spending plans, it is now necessary for the Government to announce a freeze in the public sector wage bill, and an immediate review into the cost of public sector pensions. This would persuade the markets, and the rating agencies, that the Government is serious about cutting the unsustainable deficit, and enabling the private sector to drive Britain’s recovery.”

Leading Economists Call For Rapid Deficit Cut

(Telegraph) – A GROUP OF LEADING ECONOMISTS have warned that the Government is putting Britain’s economic recovery at risk without a ”credible” plan for cutting its massive budget deficit.

An array of eminent academics and policy-makers put their names to an open letter urging that borrowing had to be reduced more quickly than Chancellor Alistair Darling has set out.

They urged whoever won the forthcoming general election to present a ”detailed” strategy to wipe out the underlying, structural deficit within five years.

There was a ”compelling case” for cuts in 2010/11, they added.

George Osborne, the shadow chancellor, cited the intervention as proof that Prime Minister Gordon Brown’s argument for dealing with the deficit had ”collapsed”.

The Tories have promised to go ”further and faster” in dealing with the £178 billion deficit than Labour’s plans to halve it within four years. They want to start cutting in 2010.

The letter, to The Sunday Times, is signed by four former members of the Bank of England’s monetary policy committee (MPC).

Other signatories include a former permanent secretary to the Treasury and Cabinet Secretary, and ex-chief economists of the International Monetary Fund, the Bank of England and HSBC.

They write: ”In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.

”In order to minimise this risk and support a sustainable recovery, the next Government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 Pre-Budget Report.

”The exact timing of measures should be sensitive to developments in the economy, particularly the fragility of the recovery.

”However, in order to be credible, the Government’s goal should be to eliminate the structural current budget deficit over the course of a Parliament, and there is a compelling case, all else equal, for the first measures beginning to take effect in the 2010/11 fiscal year.”

They added that most of the deficit reduction should come from cuts in public spending and that any tax increases should be ”broad-based”.

They also called for more independent monitoring of the Government’s performance against its fiscal goals.

Mr Osborne said: ”This is a decisive moment in the economic debate in Britain – a moment when Gordon Brown’s argument on the deficit has collapsed and a new consensus for more decisive action emerges.

”An impressive array of top economists, not just from Britain but around the world, are now clearly warning that the government does not have a credible plan to deal with the deficit and that this threatens the recovery with higher interest rates.

”Crucially, these economic experts also say there is a compelling case for starting in 2010 and that there should be independent oversight of the forecasts – two arguments we Conservatives have been making with force for months now.”

Mr Darling is currently working on his last Budget before the election. It is expected to be held towards the end of March, ahead of a May 6 election.

The Sunday Telegraph reported that there were divisions between the Prime Minister and the Chancellor about the thrust of the financial statement.

Mr Brown was said to prefer a voter-friendly budget with spending increases in certain areas and even a hint of tax cuts. Mr Darling was apparently more keen to be frugal until the economy’s recovery is better established. He is reported to be considering raising VAT to up to 20%.

The full list of signatories to the letter is: Orazio Attanasio, UCL; Tim Besley, LSE; Roger Bootle, Capital Economics; Sir Howard Davies, LSE; Lord Meghnad Desai, House of Lords; Charles Goodhart, LSE; Albert Marcet, LSE; Costas Meghir, UCL; John Muellbauer, Nuffield College, Oxford; David Newbery, Cambridge University; Hashem Pesaran, Cambridge University; Christopher Pissarides, LSE; Danny Quah, LSE; Ken Rogoff, Harvard University; Bridget Rosewell, GLA and Volterra Consulting; Thomas Sargent, New York University; Anne Sibert, Birkbeck College, University of London; Lord Andrew Turnbull, House of Lords; Sir John Vickers, Oxford University; Michael Wickens, University of York and Cardiff Business School.