Cut spending but don’t raise taxes, IOD’s chief economist warns

THE UK economy is in for “one ‘L’ of a recovery” but only if the coalition government concentrates on cutting public spending rather than raising taxes, the Institute of Directors’ chief economist told a Yorkshire business audience.

Graham Leach, who said there was the potential for “radical changes” within the economy under the Conservative-Liberal Democrat coalition, also warned that between 300,000 and 700,000 public sector jobs could be axed in the regions over the next three years.

However, Mr Leach, who described the recent £6bn announcement of spending cuts as a “derisory sum”, said many jobs would also be created in the private sector under government plans.

Speaking to an invited audience at a luncheon organised by the IOD’s Young Directors Forum at the City Inn Hotel in Leeds yesterday, Mr Leach said the formation of the new government had led to compromises between the two parties which could impact negatively on business.

He said: “What we really want to see in the Emergency Budget is the four to one ratio between spending and taxation maintained. If we move out of that there’s a likelihood of a double dip recession. But we need decisive action not gradulalist action and the more we do to tighten fiscal policy the more we can maintain low interest rates.”

He said the IOD didn’t believe Prime Minister David Cameron would abandon the government’s proposed increase of Capital Gains Tax from 18% on all gains over £10,100 a year to a much higher level and warned the move could badly affect enterprise.

He said: “I don’t think they’ll abandon this policy but there will be some compromise. The wrong decision here could impact the entrepreneurship in this country and it’s that entrepreneurship that will drive growth in this country.”

It would also be vital to cut public spending rather than implement tax rises in the Emergency Budget on June 22, Mr Leach said.

And although the IOD wants to see the 50% top rate of income tax payable on income of more than £150,000 to be cut, there is little likelihood in the immediate future.

Mr Leach said issues which could dominate the headlines over coming months include education and voting reform.

But he said cutting the deficit through spending cuts was the most important issue in making sure the recovery was stable and resembled an ‘L’ shape, and argued that if taxes had to be raised they should be indirect ones.

“The threat (of a return to recession) is reinforced by problems in Greece,” he said. “We can’t be complacent.”

On the relationship between Mr Cameron and Deputy Prime Minister Nick Clegg, Mr Leach added: “We’ve seen the Downing Street ‘love in’ between Nick and Dave. I think maybe it could last.

“The personal dynamics that are important seem to be there. And importantly there is a strong relationship between Number 10 and Number 11 Downing Street.”