Darling’s £15bn Pre-Budget poser

AN EXTRA £15bn of fiscal tightening will be required if the Chancellor is to meet the Treasury’s Budget 2009 projections for public borrowing in the medium term, a top economist said today.

In a special report Ernst & Young’s ITEM Club said next week’s Pre-Budget Report represents an opportunity for Alistair Darling to set out a clear strategy for putting the public finances back on a more sustainable footing.

However, the report warns that “premature and over-aggressive fiscal tightening”
may damage any recovery.

Professor Peter Spencer, chief economic adviser to ITEM Club, said: “The UK’s fiscal reputation is on notice – given the size of the deficit, action is needed. 

“A key issue, however, in designing the post-election fiscal strategy is the impact that the sizeable policy tightening needed will have on the strength of the economic recovery.  

Prof Spencer says there is limited scope for action because interest rates are so low that can’t be cut further to offset the negative effects of fiscal tightening on spending.

ITEM said evidence from the turn of events in the Japanese economy in the 1990s highlights the danger of premature and
overly-aggressive fiscal tightening, the consequences of which were a double-dip recession and Japan’s infamous ‘lost decade’.