Economic slowdown could spell spending cuts or tax rises

17 September 2008

The government could be faced with the stark choice of slashing public expenditure or increasing taxes if it is to avoid further heavy borrowing over the next three years.

The warning came from the National Institute of Economic and Social Research (NIESR), a leading think-tank.

A combination of the financial turmoil in the money markets, the dampening of consumer spending, the slowdown in business output, the cost of higher unemployment and a drop in government tax income will, the NIESR predicted, result in significant additional public borrowing.

With growth set to remain weak for the foreseeable future, the NIESR said that the government would have to consider serious reductions in spending, perhaps by as much as 3 per cent or £20 billion, or serious increases in taxation, perhaps by as much as 5 per cent.

The Institute predicted that decisions over spending or tax would be need to made by 2011 if Treasury finances are not to slip even further into debt.

Ray Barrell, the Institute’s senior fellow, said: “The government needs to be seriously rethinking spending plans given what has happened over the past year. Either spending needs to be cut or taxes must rise.”