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8 March 2010

The Tories should listen to their own economic adviser

Senior Tory pundit warns that early spending cuts would plunge UK economy back into recession.

By George Eaton

Conflicting advice for the Tories on spending cuts this morning.

Here’s the Institute of Directors:

We are convinced that we need swift action to tackle the Budget deficit. This means making significant spending cuts in 2010. We believe that lower spending is likely to trigger a whole series of positive developments that will assist growth.

And here is Sir Alan Budd, one of the party’s senior economic advisers:

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If you go too quickly, then there is a risk that the recovery will be snuffed out and we will go back into a recession — I mean what the Americans say: “Remember 1937.”

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Budd, who is expected to run the Tories’ new Office of Budget Responsibility, is of course right. As our own David Blanchflower has consistently warned, the immediate spending cuts promised by George “Slasher” Osborne would likely trigger a double-dip recession. So long as the level of lending to businesses remains low, the state must step in to boost demand.

Osborne has hailed the IoD’s Budget submission (and a similar report from the CBI) as evidence that the economic consensus is moving in the Tories’ favour.

But he should be wary of courting such right-wing company. The IoD has called for public spending to be slashed from 48 per cent of GDP to 35 per cent, in part so that corporation tax can be reduced from 28 per cent to 15 per cent.

Osborne has already promised early action to cut the headline rate of corporation tax to 25 per cent and the Tory treasurer, Michael Spencer, has spoken of a rate of 20 per cent by the end of a first parliament.

In a previous report, co-authored with the TaxPayers’ Alliance, the IoD suggested, among other things, a two-year public-sector pay freeze, abolishing Sure Start and scrapping the Education Maintenance Allowance.

Osborne may yet need to turn to the IoD for advice on cuts. The Institute for Fiscal Studies has estimated that the Tories’ promise to ring-fence spending on health and overseas aid, combined with their pledge to reduce the deficit faster than Labour, means that all other departments face cuts of 22.8 per cent by 2014-2015.

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