Warning on impact of slide back into recession

Business Correspondent/Personal Finance Editor

Wednesday 6 March 2013

A slide back into recession for the UK economy would have a "scary" effect on the public finances, the director of the Institute of Fiscal Studies has said.

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SIMON BAIN

Paul Johnson told the David Hume Institute: "The public finances are incredibly sensitive to what is going on in the economy, if we were to go into another recession, as a result particularly of external forces, net debt would rush up through 100% of national income and beyond -whether it can bear that is somewhat unknown territory for the UK."

The Chancellor George Osborne had delayed two-thirds of his proposed spending cuts until after the next General Election, and projections showed that tax increases would deliver only 15% of the money he needed to balance the books by 2017-18. However, that was "unlikely to happen", Mr Johnson said in Edinburgh last night.More likely were borrowings and especially tax rises, as the IFS had found the average pre-election budget had raised £1.3 billion (in today's prices) from tax increases, whereas the average post-election budget had raised five times as much at £6.5bn.He said the effect of protecting the NHS, schools and overseas aid from the cuts became progressively more dramatic for all the other Government departments, which were due to lose an average one-third of their budgets by 2017-18. "There are very genuine questions about the deliverability of that and about the options which are actually open to the Chancellor, whichever government is in place," Mr Johnson said. Raising £20bn from the tax system, the social security budget, or a combination of the two, for example, would protect all of those budgets, he said.Mr Johnson said the cuts would barely return spending as a proportion of national income to its 2008 level and certainly not to its 1997 level. Spending on pensioners was up 60% since 1997, only one-quarter of that due to higher numbers, while the housing benefit and disability living allowance departments were the fourth and fifth largest units in government.Mr Johnson said the recession and its effect on incomes had been more significant for everyone than tax and benefit changes. He added that the "bottom third" and the top 10% had been hit the hardest, the so-called squeezed middle "have actually been less squeezed than anyone else", and pensioners had been hit the least. Workers in their twenties and early thirties had born the brunt, seeing dramatic falls in earnings.

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Warning on impact of slide back into recession

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