European News

08, Mar 2010.

Chancellor Alistair Darling should balance the public finances sooner than planned but is right to avoid big cuts this year to protect the fragile recovery, the Confederation of British Industry said.

The nation's budget deficit, set to come in at over 12 percent of gross domestic product, has become a battleground for political parties, due to fight an election by June, and stirred worries that Britain could lose its triple-A credit rating.

The Conservatives have said they would take radical action to curb spending soon after winning power, while the Labour government has ruled out immediate cuts, which it fears could tip the economy back into recession.

The CBI reckons the government should hold off making any dramatic spending cuts until next year.

"The economy is in a very fragile state and it's a finely balanced judgement, but the process should get seriously underway in 2011," CBI Director General Richard Lambert told a news briefing, presenting the CBI's budget recommendations.

"The degree of fiscal tightening we'll need is more challenging than other G7 countries. But one real advantage is that the maturity of government debt is longer than other countries, and we're confident the UK's credit rating is sustainable," he added.

Britain emerged from an 18-month recession at the end of last year, but recovery is likely to be slowed by tight credit and weak corporate demand, while future fiscal tightening will hit household budgets.

In a letter to Darling setting out its wish-list for the government's budget, expected later this month, the lobby group reiterated its call for a balanced current budget by 2015/16 rather than 2017/18 as planned.

The CBI reckons that could be achieved by freezing public workers' pay and altering the retirement age and pensions entitlements of government employees, rather than raising taxes and cutting capital spending.

It calculates the government could save 130 billion pounds through a radical reform of public services.

"A target date of 2015/16 for restoring budget balance would send a powerful message to investors," said CBI chief economic adviser Ian McCafferty. "This medium-term target is much more important for credibility than the exact start date for action."

The government is pencilling in a current budget deficit of 128.1 billion pounds this year, falling to 91 billion by 2012/13. Darling has pledged to halve public sector net borrowing -- the government's preferred measure -- over the next four years from above 170 billion pounds this fiscal year.

The CBI also urged the government to reverse a planned 1 percentage point rise in employers' national insurance contributions from 2011 and to reconsider its fuel duty and air passenger duty levies.