Monday, January 4, 2010

Fiscal Crisis Risk Looms Over Britain: Experts

. Monday, January 4, 2010

By Chris Giles and Daniel Pimlott

Britain is in danger of succumbing to a budgetary crisis in 2010 with the economy likely to still be in the doldrums at the end of the year, a Financial Times survey of economists warns today.

Asked to name the three biggest risks to the economy, 37 of the 79 economists questioned said the UK faced a fiscal crisis as investors refused to buy government bonds at current high prices, resulting in higher interest rates and a stalled recovery.

The leading economists - from the City, universities and including seven former members of the Bank of England's monetary policy committee - insist the government must make its plans to improve the public finances more transparent and credible if Britain is to avoid the fiscal crises that have engulfed Greece and Ireland over the past year.

Among those surveyed, Howard Davies, the London School of Economics director and a former MPC member, said: "The major risk is the loss of confidence in the government's ability to get the public finances back under control."

Sir John Gieve, deputy governor of the Bank of England until last year, said: "Inadequate plans for redressing the fiscal deficit lead to sharply rising rates and falling sterling."

But economists were divided about what to do about the threat. Half agreed with the Conservatives that action to cut spending and increase taxes was needed in 2010, while half warned that a rapid reduction in Britain's borrowing would undermine the recovery. David Blanchflower, a former MPC member, said: "There remains a danger of a double-dip recession if stimulus is removed too quickly."

Britain's government will borrow 13 per cent of national income in 2010, a record in peacetime and, while the scale of the deficit is already being addressed with the ending of a temporary 2.5 per cent reduction in value added tax on January 1, serious public spending cuts are not planned until April 2011.

The majority of economists surveyed thought the economy was rebounding and would grow in 2010. But they believed the government and the Bank of England were too optimistic about the pace of recovery.

Only 16 per cent thought the economy would be growing at an aboveaverage rate of 2.5 per cent by the end of 2010 - something assumed by the authorities - while 60 per cent thought growth would remain below par because of financial pressures on households and companies.

Economists seem more optimistic than they have been for the past two years, however, with few expecting another big rupture. This optimism is shared by chief financial officers surveyed by Deloitte, the accountant, which thought that financial prospects were the best for two years.

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