Britain taking a major gamble with cuts programme: analysts

20th October 2010, Comments 0 comments

The British government says swingeing public sector cuts unveiled Wednesday are the only way to restore economic growth but critics warn they are a gamble that risks plunging Britain back into recession.

Finance minister George Osborne announced plans to cut government-wide spending by an average of 19 percent, to save 83 billion pounds (130 billion dollars, 95 billion euros) by 2014-15 to help pay off a record deficit.

He said the debts left by the previous Labour government "threatened every job and public service in the country" and the spending cuts have "taken our country back from the brink of bankruptcy."

The impact of the cuts will be profound, according to Jon Sibson, analyst at professional services firm PwC, not just in the public sector where nearly 500,000 jobs will be lost, but across society.

"The severity of the spending cuts announced today goes beyond anything in living memory," he said.

"This Spending Review, more than any other, will have far-reaching impacts, not just within the public sector, but on businesses, communities, and individuals."

But commentators disagree on the implications for the wider economy.

The International Monetary Fund has enthusiastically approved the measures as necessary to help pay off a record 154.7-billion-pound deficit, and recently said the British economy "is on the mend" following a deep recession.

Professor Michael Ben-Gad, head of economics at City University London, said Wednesday the only alternative to cuts would be "to allow the debt to continue to rise and hope that the economy will somehow grow fast enough to catch up."

Richard Lambert, director of the CBI business lobby group, added: "The spending cuts, though painful, are essential to balance the UK's books and build its future prosperity."

However, critics say there is a real risk that the plans could backfire and send Britain hurtling back into recession.

Responding to Osborne's speech in the House of Commons, Labour finance spokesman Alan Johnson warned: "Today's reckless gamble with people's livelihoods runs the risk of stifling the fragile recovery."

He also suggested that the plans reflected an "ideological objective" of some members of Cameron's Conservatives to roll back the state rather than any economic imperative -- a suggestion roundly rejected by Tory lawmakers.

Meanwhile Nobel laureate Joseph Stiglitz, an advocate of the Keynesian theory that investment stimulates growth, warned in an article in The Guardian on Wednesday that "Britain is embarking on a highly risky experiment."

"In a better world, we might rightfully debate the size of the public sector... but today cutbacks in spending will weaken Britain," he wrote.

Despite the job losses, the government expects unemployment to fall in the coming years from a current level of 7.7 percent.

But Mark Bolsom, a chief trader at Travelex Global Business Payments, said: "The coalition is gambling that the private sector will step in and plug the gap in the jobs market but there is no guarantee that this will be successful."

He added: "Ultimately, if the private sector does not step forward to plug the gap in jobs, the UK will fall back into recession and sterling's value will plummet."

One Liberal Democrat minister in the coalition, Chris Huhne, has suggested the cuts could be scaled back if the economy deteriorates, although Osborne has not admitted this possibility.

However, the National Institute of Economic and Social Research, a think tank, said ministers may be forced to reconsider their plans, estimating that economic growth and tax yields may be lower than officials estimate.

"We suspect that spending cuts will be delayed and their scale reduced as compared to the budget plans," it said, adding that taxes may have to go up to bridge the gap.

© 2010 AFP

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