Conflict Over UK Budget may Lead to Economy’s "Irreparable Damage"

The UK’s plans for cutting its budget deficit have come under harsh criticism in a new report from the European Commission. The Commission does not see the UK’s current strategy as being aggressive enough to make a 2015 deadline according to EU rules. On the other side, the UK Chancellor Alistair Darling believes that deeper cuts to government spending would chance a return to recession.

According to the BBC:

“Chief Secretary to the Treasury Liam Byrne said the report was “wrong” and would mean £20bn more in spending cuts. Ministers insist their plans to halve the deficit in four years are less likely to halt the economic recovery.

“In an interview with the BBC, Mr Byrne said the spending cuts and tax rises required to meet the EU target would cause ‘irreparable damage’ to the economy.

“Shadow business secretary Ken Clarke, also speaking to the BBC, said the EU was right and the government needed to cut spending more rapidly, which could be done easily.

“He said the UK needed to cut its deficit or ‘interest rates will rise, unemployment will rise and there will be no economic recovery’.”

The Commission report points out that the deficits of EU governments must stay under 3 percent of GDP, while the UK is trending closer to 12.6 percent for 2010. It also indicates that the UK is probably being too optimistic about its growth rates over the next six years. Given the inherently shaky nature of a government-spending induced recovery the Commission is likely to be right on that point.

Read more about the budget controversy in the BBC’s coverage of EU calls for faster UK deficit cuts.


Rocky Vega,
The Daily Reckoning