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Tax hikes and spending cuts 'inevitable' after election

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30th Apr 2010
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The basic rate of income tax is going to have to go up by 6 pence in order to reduce the budget deficit down to 3% - regardless of which party triumphs next week in the general election.

The National Institute for Economic and Social Research (NIESR) warned that that such a rise would only be part of a range of tough economic decisions that would have to be taken, including an extra £30bn in spending cuts.

Ray Barrell, director of macroeconomic research at NIESR, said: "The crisis has made us 4% poorer. It means we have to assume there is a problem with our spending plans. Increasing debt means we are borrowing from our children and our grandchildren. We need more spending cuts and higher taxes to bring the deficit down.”

In its quarterly report, the NIESR  criticised all parties for failing to detail how they would tackle the deficit and said that cutting spending by £6bn rather than raising national insurance contributions would likely hurt the economy and put 60,000 out of work without making a big difference to debt.

Martin Weale, the director of NIESR, warned against increasing VAT, which he said would increase inflation, though he expected the next government would find it harder to cut public spending than expected and would need to turn to tax rises. Current plans by all parties to reduce spending and pay down debt would not be enough to prepare the country for a deep recession, he added. "The UK for more than 20 years has run its affairs as if there is no point saving. It has had the lowest savings ratio of any OECD country.”

NIESR said it expected the economy to grow only sluggishly for the next three years, with gross domestic product growing by 1pc this year, followed by growth of 2pc and 2.2pc in 2011 and 2012. It also expects the Bank of England to start raising interest rates at the end of this year, although it could take five years until they come anywhere near the levels they were before the financial crisis.

"Britain's economic performance during and after the recession has been disappointing, with weak performances for output, unemployment and the fiscal position,” said Weale. "Politicians' announcements about ring-fencing make it harder to resolve the fiscal legacy of the current government."

That legacy is not impressive concludes the Institute which had damning words for Labour's economic record. Claiming that "policy structure has failed”, the report says that the stewardship of Tony Blair and Gordon Brown had left the UK  "less well equipped than it might have been to meet the challenges of the crisis".

Sir Alan Budd, one of the authors of the report and former chief economic adviser to the Treasury, commented: "The triumphalism of the early days of the Labour administration now seems to have been sadly misplaced. The charts that are now being used to condemn the government's fiscal performance look remarkably like those that it used a decade ago to ridicule the performance of its predecessor."

The NIESR found that "Labour has not run the economy in a sustainable way", but did conclude that the UK has outperformed most other economies in the G7 group, which also includes Canada, France, Germany, Italy, Japan and the US. Since 1997, it has had the second highest growth rate in the group of industrialised nations, whereas under the Tories it was in third place.

Labour has delivered an improvement in Britain'’s productivity performance relative to other large economies,” admitted Weale. “However, the labour market has not done well and performance during the recession has been disappointing.”

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