Dire need for fiscal plan

Letter by IEA economists in The Sunday Times on the need to reduce Britain's budget deficit

AS economists with experience in financial markets, economic modelling, policy advice and academic research, we are concerned about the integrity of fiscal and monetary policy in the UK. The absence of even the rudiments of a convincing plan to reduce Britain’s structural budget deficit in the December pre-budget report was highly irresponsible and risks damaging the economy. It showed alarming complacency in the face of the fiscal challenges facing the UK.

In the absence of a comprehensive spending review, not only is there a heightened risk of the UK’s sovereign-debt rating being downgraded, with immediate consequences for sterling and the country’s debt-servicing costs, but government debt could embark on an unsustainable path, and may already have done so.

There is an associated risk to the credibility of UK monetary policy, particularly if international investors were to see the Bank of England’s programme of quantitative easing as driven by a politically motivated desire to ease the government’s funding difficulties. Mervyn King, the governor of the Bank, has called for a credible plan to reduce the budget deficit. The government has not provided such a plan, and looks as if it has no intention of doing so for reasons of political expediency.

While there is room for debate about the pace of reducing the budget deficit in the initial phases of recovery, there should be no debate about the need for a cl