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UK Needs GBP20bn More In Tax

Tuesday, March 9, 2010

Additional tax rises or spending cuts of around GBP20bn (USD30bn), over and above current plans, will be needed by 2013/14 to close the fiscal gap, according to PricewaterhouseCooper's latest UK Economic Outlook report.

PwC’s projections for the UK public finances suggest that public borrowing could be close to the Treasury forecast in 2010/11.  Beyond that, however, the Treasury projections are based on sustaining average GDP growth of 3.25% from 2011/12 through to 2014/15, which is well above average independent forecasts which project average GDP growth over this period of only around 2.5% per annum.

“Our projections are based on a more cautious view of medium-term growth potential than the Treasury," said John Hawksworth, head of macroeconomics, PwC.

The report states that the fiscal gap could be closed through many possible combinations of additional tax rises and spending cuts starting from 2011/12 and building up to around GBP20bn per annum (at 2009/10 GDP values) by 2013/14.

“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%, while the real cuts in unprotected areas could vary from 17%-27%.  In practice, a spending squeeze towards the middle of the range might appear most plausible, supplemented by perhaps around GBP10bn or so of additional tax increases," Hawksworth added.

Echoing similar sentiments expressed by the Confederation of British Industry earlier in the week, Hawksworth said that international investors are looking for signs of a more "credible" budget plan.

“The details of this package will be for the next government to decide, but the bond markets and credit rating agencies will be looking for a credible medium-term fiscal consolidation plan to be announced soon after the next general election," he said.