£10bn budget giveaway rejected by Treasury
The Treasury look set to persevere with their tough austerity plan even though the Institute for Fiscal Studies (IFS) have argued that a £10bn budget giveaway would be possible.
At the time of the 2011 budget the IFS were on board with George Osborne’s deficit reduction plan, however, they have now suggested that rather than forcing the Bank of England to raise interest rates the Treasury could give the economy a £10bn boost as: “the case for a significant short-term fiscal stimulus to boost the economy is stronger than it was a year ago.”
IFS director, Paul Johnson suggested there is a need to repair the fiscal damage caused by the recession but if the chancellor announced tax cuts or increased spending worth £10bn on budget day he would not be critical. Johnson warned that if the fiscal easing was increased to £15bn or more it could unsettle the financial markets.
George Osborne believes that the Bank of England should be responsible for any short term economic boost and feels that the Treasury deficit reduction programme allows the Bank to keep the current interest rate of 0.5%, lower than it would otherwise be.
Labour are in agreement with the IFS and want George Osborne to take fast action to risk permanent damage to the economy by temporarily cutting V.A.T and National Insurance contributions for employers and adding additional infrastructure spending.
The IFS say lower than forecast spending would mean the chancellor would have to borrow £124bn this year, £3bn less than he estimated last November, meaning that by 2016/17 borrowing could be £9bn lower. The IFS added that If Osborne recycles the £3bn under-spending by Whitehall departments during 2011-12 into a higher infrastructure investment in 2012-13 it would: “represent a modest fiscal loosening that could be easily explained to the markets and therefore would be relatively risk-free.”