£20bn of cuts ''needed by 2013/14''

Tuesday, March 09, 2010

The economy is expected to grow at just 1 per cent in 2010, picking up to around 2.5 per cent in 2011 and tax rises or spending cuts of around £20bn over and above current plans will be needed by 2013/14 to close the fiscal gap, according to PricewaterhouseCoopers' latest report.

PwC's projections for public finances suggest that public borrowing could be close to the Treasury forecast in 2010/11. Beyond that, however, Treasury projections are based on sustaining average GDP growth of 3.25 per cent up to 2014/15, while independent forecasts predict growth of just 2.5 per cent per annum.

The fiscal gap could be closed by various combinations of tax rises and spending cuts, PwC said, starting in 2011/12 and building up to around £20bn per annum (at 2009/10 GDP values) by 2013/14.

John Hawksworth, head of macroeconomics at PricewaterhouseCoopers LLP, said: "We see public sector net borrowing remaining at around 5 per cent of GDP in 2014/15, as compared to the latest Treasury forecast of a 4.4 per cent budget deficit in that year. Public borrowing in the medium term could therefore exceed the levels projected by the Treasury meaning that, with public debt heading to just above 80 per cent of GDP in 2014/15, there could eventually be an adverse bond market reaction that would significantly push up the cost of servicing this rising debt."

He added: "Depending on the mix of tax rises and spending cuts adopted, the scale of the cumulative real departmental spending cuts required in the three years to 2013/14 would be around 9-14 per cent, while the real cuts in unprotected areas could vary from 17 per cent-27 per cent. In practice, a spending squeeze towards the middle of the range might appear most plausible, supplemented by perhaps around £10bn or so of additional tax increases."