Osborne 'needs a plan B on economy'

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Chancellor George Osborne should have an 'alternative plan' for the economy, a think-tank has said

Chancellor George Osborne should prepare an “alternative plan” for the economy in case his austerity package of spending cuts and tax hikes fails to balance the books, a respected economic think-tank has said.

In its annual Green Budget, the Institute for Fiscal Studies gave a broad endorsement of the Chancellor’s approach and said he would be wrong to use his March 23 Budget to seek to sugar the austerity pill with tax and spending giveaways.

But it warned that Mr Osborne may miss his target of eliminating the deficit over the next four years, due to “sluggish” GDP growth and the “formidable” difficulty of delivering cuts on a scale not seen since the Second World War.

The Chancellor was right to resist calls to change course in response to last month’s disappointing growth figures – which showed GDP shrinking by 0.5% in the last quarter of 2010 – but should spell out what his plans are if the economy takes a further turn for the worse, said IFS director Paul Johnson.

“I think it’s quite right that on the basis of one poor month’s figures they’re not changing course, but they really ought to set out what they will do in the face of a significant change in the economy and a significant difference,” said Mr Johnson.

“I think it’s rather important actually that we do know under what circumstances they will change their policy.”

Among industrialised nations, only Greece was seeking to reduce its deficit at a rate as fast as the UK, and only Ireland and Iceland were cutting public spending so quickly, the report said.

Planned cuts totalling £81 billion were more ambitious than those imposed by John Major’s administration in the 1990s and might prove “formidably hard to deliver”, particularly in services such as the police where manpower reductions will be “difficult to achieve cost-effectively on the proposed timescale”.

Meanwhile, growth over the medium-term is likely to be lower than predicted by the Office for Budget Responsibility (OBR), whose forecasts are used by the Chancellor to plan his Budget.

Labour’s shadow chief secretary to the Treasury Angela Eagle said: “The IFS report is right to warn about the serious risks to growth that our economy faces and that without growth George Osborne won’t meet his own deficit reduction targets. It’s time he heeded those warnings and got himself a plan B.”

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