In its March economy report, the auditor says the winner of the next general election will have to “cut back sharply in the medium term to bring under control an unsustainably large budget deficit”.
It predicts that this fiscal squeeze will keep interest rates low in 2010, but it says the Bank of England will have to increase rates to 2.5 per cent by the end fo next year.
PwC also predicts that UK GDP will grow to 1 per cent by the end of the year and up to 2.5 per cent by the end of 2011. This is lower than the Government prediction of 1.5 per cent for 2010 and 3.25 per cent in 2011.
PwC head of economics John Hawksworth says: “Public borrowing in the medium term could exceed the levels projected by the Treasury and there must be a risk that, with public debt heading to just above 80 per cent of GDP in 2015 on our estimates, there could eventually be an adverse bond market reaction that would push up significantly the cost of servicing this rising public debt.”
Hawksworth says the Government should be aiming to plug the deficit by 2016 instead of the current timetable of 2018. He says this is necessary to create a buffer against any future financial shocks as well as the longer term fiscal costs of an aging population.
He says: “A spending squeeze towards the middle of the range might appear most plausible, supplemented by perhaps around £10bn or so of additional tax increases.
“The details of this package will be a matter for the next Government to decide, but the bond markets and the credit rating agencies will be looking for some such credible fiscal consolidation plan to be announced in an emergency Budget soon after the next general election.”