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UK Economy
City fears politicians avoiding hard truths
From the Financial Times of Thu, 11 Dec 2014 19:21:45 GMT

Economists complained after Ed Miliband’s speech on the deficit that no UK political party had yet given enough detail on how to repair Britain’s public finances.

Ahead of next May’s general election, the City is worried that many politicians are avoiding hard truths about possible tax rises and awkward cuts in spending. Business is increasingly concerned about electoral predictions pointing to a fragmented parliament and an unstable government.

“People are worried about a whole range of political risks — there are risks in a Conservative majority, there are risks in a hung parliament, and there are risks in a Labour majority,” said Michael Saunders, an economist at Citi.

“On fiscal policy there is a sizeable hole in the coalition’s plans, in that we don’t quite know how the squeeze on spending will be achieved, and there’s an even bigger hole in Labour’s plans in that we don’t even know what their spending and tax plans are.”

The independent Office for Budget Responsibility predicts Britain will have public sector net borrowing of £91.3bn or 5.0 per cent of GDP this fiscal year. Labour’s goal over the course of the next parliament is to achieve a current budget surplus, so that revenues more than cover day-to-day spending.

That is a less ambitious target than the Conservatives, who on the latest projections promise an absolute surplus of £23bn by the end of the next parliament. On current plans, that implies the gap between the two parties’ public spending plans could be roughly £27bn a year by 2019/20.

But neither party has explained how exactly they would reach their respective surpluses — whether through further departmental spending cuts, welfare cuts or tax increases. Mr Miliband said on Thursday “unprotected” departmental spending would have to be cut by an unspecified amount every year.

He also mentioned some ways of raising tax revenue, such as restoring the top 50p rate of income tax. But he would not reveal the ratio of tax increases to spending cuts that Labour aimed to achieve.

Philip Rush, an economist at Nomura, said the speech did little to change the City’s impression of Labour’s approach to the public finances. “People generally believe their fiscal policy will be looser, rely on a mix of policies that’s a bit less credible and a bit more liable to slippage, but ultimately they’ll get there, they’ll balance the books.”

Investors fret far more about the possibility the election will result in a hung parliament and political chaos, he said. “Those kind of bigger picture issues are the kind of things that worry markets, rather than: ‘Is that little bit of extra borrowing that Labour’s doing going to make me not want to hold gilts?’”.

Economists also said there was no point in focusing too much on specific numbers, since the scale of the required fiscal consolidation was likely to change over time, depending on whether the economy proved stronger or weaker than expected.

Kevin Daly, an economist at Goldman Sachs, suspects the “cuts that they have pencilled in at the moment are unlikely [because] tax revenues will be stronger than the Office for Budget Responsibility expects.”

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