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Further cuts needed after initial recovery, says thinktank

The next UK Government must look to cut the budget deficit by an additional 2 per cent of GDP after the recovery, according to the National Institute of Economic and Social Research.

The body, which is regarded as a good indicator of real GDP movement, says GDP will grow by 1 per cent this year, picking up to 2 per cent and 2.2 per cent in 2011 and 2012.

NIESR says public borrowing will fall from 11.5 per cent of GDP this year to 4.7 per cent by 2015. This is above the Treasury’s estimate of 4 per cent, which the think tank says is based on “over-optimistic forecasts for GDP growth and for the buoyancy of tax revenues”.

But NIESR says an additional deficit reduction worth 2 per cent of GDP should be undertaken once a sustained recovery is under way. It says this is necessary to avoid possible debt downgrades. It says this will also create fiscal headroom to deal with a possible future crisis.

It says the extra retrenchment would be best undertaken with cuts in spending and increases in taxes of 1 per cent of GDP each.

In an investor note today, BNP Paribas economist Alan Clarke said there is a 50 per cent chance of a ratings downgrade: “The overriding message is that, unless further action is taken, the debt burden will approach a level that is incompatible with a AAA rating.

“Many, including ourselves, argue that the Government’s growth projections are too optimistic. Standard & Poor’s expects the UK debt-to-GDP ratio to approach 100 per cent. Agencies claim that this is not a magic number but we ask who are the AAA nations with debt/GDP over 100 per cent? There aren’t any.”

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