Economic forecasters have dealt an early blow to the Government’s spending cuts as they warned the measures would not shrink the deficit as quickly as expected.
The National Institute of Economic and Social Research (NIESR) said lower growth would lead to less taxes, which would hold back efforts to rein in Britain’s ballooning debt.
NIESR predicted the fiscal deficit will fall to 3.6% of gross domestic product (GDP) in 2014/15 rather than the 2.1% forecasted by the independent Office for Budget Responsibility (OBR).
It said the main reason was that growth would be slower than the OBR assumed, reducing the tax base.
In its latest forecasts for the UK economy, it also said the Government may struggle to go through with the cuts at the pace and scale implied in its emergency Budget.
It said if this were the case, the Government should meet the shortfall by raising direct taxes.
“If the cuts were half the size and direct taxes were raised to fill the gap, then output growth would be 0.25% higher in 2011 and 2012,” said NIESR.
The group has revised down its growth forecasts for 2011 and 2012 in the face of the Government spending review.
It believes the UK will see GDP of 1.6% in each year, down from original predictions for 1.7% in 2011 and 1.8% in 2012.
The group said there remained a one in five chance that output would fall in 2011 as a whole.