Brown’s Spending Cuts Will Be Worst Since 1976, IFS Says

By Gonzalo Vina

Sept. 17 (Bloomberg) -- Prime Minister Gordon Brown’s government may have to cut spending at the sharpest pace since Britain negotiated its finances with the International Monetary Fund in 1976, the Institute for Fiscal Studies said.

The non-partisan research group estimated the government will squeeze its budget by 2.9 percent a year from 2011, more than the 2.3 percent it expected in April. It based its analysis on Treasury documents obtained by the Conservative opposition.

“What we have learned from the leaks are the government’s plans to cut spending by 2.9 percent each year, which is the tightest since the IMF imposed spending plans in the late 1970s,” said Gemma Tetlow, a research economist at the group that counts the Bank of England and Treasury among its clients.

The forecast undermines Brown’s suggestion that the government can safeguard funds for education, police and other public services while the Treasury works to put a lid on the budget gap. Britain’s shortfall next year will exceed 12 percent of gross domestic product, the most in the Group of 20 nations.

Conservative leader David Cameron, who passed out the documents to journalists in London yesterday, said they show Brown has misled Parliament about the scale of the fiscal tightening that must follow the next election due by June.

The documents suggest Britain will pay 63 billion pounds ($104 billion) on debt interest in 2014, more than it spends on education. The IFS estimated that to avoid spending cuts the Treasury would have to raise taxes by 29 billion pounds, amounting to 2.1 percent of national income or 930 pounds per family per year.

‘Drag Anchor’

“The risks of having such a huge deficit are a drag anchor on the recovery,” Cameron said at a press conference yesterday. Brown “was saying one thing in Parliament. Documents say he was doing something different. He has to explain himself.”

Until this week, Brown has refused to acknowledge that cuts will be needed to erode the national debt which is due to more than double by 2014. Instead, he characterized Labour as the party that would keep public spending rising while the Conservatives were the party of cuts.

Brown’s spokesman, Simon Lewis, said “the prime minister would never mislead Parliament.” He declined to comment on the leaked documents, adding that the Treasury makes “plenty of assumptions” on “different scenarios.” The Treasury plans to investigate who leaked the papers.

The IFS says the fiscal squeeze it forecasts amounts to about 8.6 percent of GDP over three years. That’s sharper than the 8 percent reduction Liberal Democrat lawmaker Vince Cable proposed earlier this week.

Cameron vs Brown

Cameron sidestepped the question about how quickly his party would rein in spending, saying only that the Treasury’s plan to increase spending by 30 billion pounds to 702 billion pounds in the year through April 2011 seemed “excessive.

“We believe we ought to get on with it more quickly,” Cameron said. “If you start earlier you’re going to make faster progress.”

The IFS estimated that if the Conservatives sped up the deficit reduction, taking four years instead of eight currently planned by the Treasury, the cost would be 44 billion a year, or an average 1,400 pounds per family.

The Treasury already has announced tax increases on incomes above 100,000 pounds and fuel duties that will make up about 10 percent of the total, leaving spending cuts to absorb the rest.

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To contact the reporter on this story: Reed Landberg in London at landberg@bloomberg.net.