January 3, 2010 10:31 pm

UK deficit warning from City economists

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Britain is in danger of succumbing to a budgetary crisis this year, with the economy likely to stay in the doldrums until at least the end of 2010, a Financial Times survey of economists warns.

Asked to name the three biggest risks to the economy, 37 of the 79 economists polled said the UK was threatened by a fiscal crisis that could derail any revival.

Howard Davies, director of the London School of Economics and a former member of the Bank of England’s monetary policy committee, 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, former deputy governor of the central bank, said that inadequate plans for addressing the fiscal deficit could result in sharp rate rises and a fall in the pound.

The warning from City economists, former MPC members and academics comes as politicians stepped up pre-election skirmishing.

Gordon Brown was accused by his rivals on Sunday of being “dishonest” for refusing to concede that substantial spending cuts were needed to tackle the projected £178bn budget deficit.

Asked about the government’s planned spending cuts from 2011 in a BBC interview, the prime minister said: “You’ve got to be prepared to invest. The Tories won’t.”

He added: “We’re raising national insurance by 1 per cent to protect our public services so that we can still spend more on health and more on education and more on policing.”

The Conservatives said his comments explained the “open despair” in cabinet.

Most of the economists thought the economy was recovering and would grow in 2010, but they believed the government and Bank of England were too optimistic about the pace of the rebound. Only 16 per cent thought the economy would be growing at an above average rate of about 2.5 per cent by the end of the year.

The economists said the government must make its plans to improve the public finances more transparent and credible if Britain was to avoid the fiscal crises that have engulfed Greece and Ireland. Should investors refuse to buy government bonds at current high prices, interest rates would rise and the recovery was likely to stall.

But economists were divided over what to do about the threat of a fiscal crisis.

Half of those polled backed the Conservatives’ view that action to cut spending and increase taxes was needed urgently in 2010. Half warned that such rapid reduction in borrowing would undermine the recovery.

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