Government plans to reduce ballooning debt 'not ambitious enough'

Government plans to deal with Britain's ballooning debt are not ambitious enough and need to be "significantly reinforced", according to a European Commission report.

In a blow to Gordon Brown's economic strategy, the Commission is warning the UK may not cut its deficit in line with EU rules by a deadline of 2015.

Its economic health report, due out tomorrow, also questions Treasury forecasts for the UK's economic growth over the coming years, saying they could be optimistic if the global economy fails to grow as strongly as expected.

The warnings come ahead of the Government's critical pre-general election Budget next week, and figures out later this week that will show whether this year's UK deficit will be worse than the £178 billion forecast last year.

The Government has pledged to halve this over four years, but not set out in detail how the reduction will be achieved. It is likely to be the biggest electoral battleground over the coming weeks.

The European Commission's leaked report states: "The fiscal strategy in the convergence programme is not sufficiently ambitious and needs to be significantly reinforced.

"A credible timeframe for restoring public finances to a sustainable position requires additional fiscal tightening measures beyond those currently planned."

The report will be published once it has been endorsed by a meeting of the Commissioners tomorrow.

A senior EU official said last night: "The message from the Commission will be that the UK needs to get its house in order."

Shadow chancellor George Osborne seized on the Commission's verdict to attack Government policy.

"This is a heavy blow for Gordon Brown's credibility," he said.

"The Conservatives have been arguing that we need to reduce our record budget deficit more quickly in order to support the recovery.

"Our argument is backed by credit rating agencies, business leaders, international investors and now the European Commission.

"That is why we need a change of Government to restore confidence in our economy at home and abroad."

A Treasury spokesman said the Government has set out a plan to halve the deficit in four years - the sharpest deficit reduction plan in the G7, backed by legislation.

"The Chancellor's judgment on the pace of this adjustment takes into account the need to support the economy through the early stages of the recovery, as well as uncertainty around prospects for the public finances, resulting from the exceptional nature and strength of the global downturn," said the spokesman.

"As the Chancellor has made clear, to withdraw support earlier and at the wrong pace risks wrecking the recovery - a judgment supported by the Commission."

In December, Mr Darling said the economy was on course to record growth of between 1% to 1.5% in 2010/11, before surging ahead to 3.5% the year after.

As a non-eurozone nation, the UK cannot be sanctioned for breaching single currency deficit and debt guidelines.

But the Commission is to make clear the Government is expected to comply with an EU deadline of 2014-15 for getting the deficit below the maximum 3% of GDP allowed under economic stability rules.

EU finance ministers set deadlines last year for reining in the UK public deficit, but latest figures forecast a reduction to 4.7% of GDP in 2012-2015 - the deadline set for getting back within 3%.

The Commission report says even this shortfall could be worse if economic growth turns out to be worse than predicted by the Treasury.

In recent weeks the pound has dropped in value amid predictions of a hung parliament in the UK, which have prompted fears action to tackle the country's deficit may be delayed.

Meanwhile, Liberal Democrat leader Nick Clegg will warn today that Britain could face massive political and social unrest on a scale similar to Greece if the next government cannot rally the public behind plans to cut the £178 billion deficit.

In a speech to the Institute for Public Policy Research, Mr Clegg will say a new government could be "torn to pieces" if it tries to "ram through" spending cuts without wider public consent.

He will argue that the scale of the cuts needed to tackle the deficit is so great, it will be essential to engage the public in the process.

If the structural deficit in the public finances is to be eliminated without further tax increases, at some point in the next eight years government spending will have to fall by as much as 10%, he will say.

"That means there is an enormous risk ahead. In a democracy, dramatic change cannot be imposed from above or it will fail. It has to be led by a process of political engagement," he will say.

"You only have to look at the scale of industrial unrest in Greece to see that it is impossible to reduce a public deficit quickly if you do not find a way to persuade people to go along with the process.

"If we do not find a way to take the people of Britain with us on this difficult journey of deficit reduction, we will not be able to make the journey. We will instead follow Greece down the road to economic, political and social disruption.

"If a government tries to ram through major change to public spending solely through the usual Westminster combination of machismo and threats from the whips, it will not only fail, it could find itself torn to pieces."

Mr Clegg will say the Lib Dems' proposed "fair tax" package - raising thresholds while closing loopholes that benefit the wealthy and raising taxes on polluting aircraft - offer a way forward.

"Tax cuts for millions will sweeten the very bitter pill of the largest fiscal contraction in modern history," he will say.

"If we do not implement these changes, it will be impossible to rally people behind public sector spending cuts and any serious attempt to cut the deficit will fail."

Shadow business secretary Ken Clarke said the EC's intervention was "a statement of the obvious".

"What has to be done now is to get this debt rapidly under control and get rid of the bulk of the structural deficit during the next Parliament," he told the BBC Radio 4 Today programme.

"I also think that one needs to start now."

Liam Byrne, Chief Secretary to the Treasury, said the EU had "got the judgment wrong".

"We think that the plan that they've set out would require us to take something like £20 billion more out of the economy by 2014/15, and that would do irreparable damage to public services or to taxpayers.

"We think that halving the deficit over four years is the right approach. It's not reckless, it's not painless either, and what we've done is set out what is now the clearest plan in the G7 to deliver on that goal."

Mr Byrne denied having ruled out no VAT or other tax rises in the Budget in an interview last week.

He said he had simply been restating Chancellor Alistair Darling's position at the Pre-Budget Report last year.

"Chancellors reserve the right to come back to tax matters at every Budget... but I repeated what the Chancellor said at the Pre-Budget Report... we've made decisions that will raise £19 billion in taxes," he said.

"Now alongside that, there are going to be cuts and efficiencies which are going to total £38 billion too.

"So we've set out a plan which is not reckless, but it's not painless either, but we've been clear about our ambitions, and that is a very clear contrast to the Conservatives."