LONDON (AFX) - The UK government will have to slash public spending or raise income tax by 2 pence if the UK abolishes the pound, the Daily Telegraph reported citing a European Parliament report due to be published today.
The detailed document, prepared jointly by seven of Europe's leading economic institutes, said that Chancellor of the Exchequer Gordon Brown's recent boost in public spending does not comply with EU fiscal discipline rules. The study contradicts government claims that membership of the euro would involve no loss of budgetary power, the Telegraph said.
Although the UK's finances are currently in good shape, the expected deficit over coming years violates the EU's growth and stability pact, which demands that governments run a balanced budget over the economic cycle. The Treasury relies on a "golden rule" that allows the Government to borrow over the cycle, provided it is for investment in public services, the newspaper said.
The UK is projected to have a deficit of 1.1 pct of GDP by 2004, trading places in terms of fiscal rectitude with the 12 countries in the euro zone, which will be running an average surplus of 0.4 pct. The report said that fiscal loosening by Mr Brown is "not ideal, given the underlying strength of demand", adding more than 1 pct to GDP both this year and next.
The Telegraph cited the European parliament report as saying: "The danger of such a policy at a time when the economy is already close to sustainable employment is that it leaves all the burden of ensuring macroeconomic stability to monetary policy."
The study will be debated by the European Parliament's economic and monetary affairs committee this afternoon, the Daily Telegraph said.