Economists have warned of Britain's large sovereign debt and suggested that the new government make huge cuts and raise taxes to tackle the nation's record deficit.
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Britain's Prime Minister David Cameron gestures as he arrives to meet Scotland's First Minister Alex Salmond at St Andrews House in Edinburgh May 14, 2010
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Britain's new Prime Minister David Cameron held his first cabinet meeting Thursday, when he symbolically cut ministers' wages by five percent, after he came to power two days ago on the back of the country's first coalition government since World War II.
A panel of economists regularly consulted by the British Treasury said Thursday that the government needs to raise 50 billion pounds (about 75 billion U.S. dollars) in the next 18 months.
It is highly likely that one of the headline tax increases will be a rise in Value Added Tax (VAT), which will take it from 17.5 percent to 20 percent, they said.
Of the 28 independent economists the Treasury surveyed, 24 said they expected the VAT rise to come into play before the end of 2011.
Another option is to scrap VAT exemption on items such as books, food and children’s clothes to help rescue the public finance, they said.
Taxes might have to raise 50 billion pounds (about 75 billion dollars), Jonathan Loynes of Capital Economics said in an interview with the Daily Telegraph. This could mean an increase of 9.5 pence (100 pence=1 pound) on top of the VAT rise.
"Tax increases eventually worth 50 billion pounds (about 75 billion dollars) or more may be needed, at least some of which may be implemented in the emergency budget," Loynes said.
The emergency budget was an election pledge from the largest party in the coalition, the Conservatives. The new Chancellor of Exchequer, George Osborne, pledged to deliver the emergency budget within a maximum of 50 days of the coalition forming. It is likely to be sooner than that.
However there are some worries among commentators that tax may not be able to bear all the weight of the savings needed.
At the time of the country's last recession in the 1990s, two Conservative chancellors of exchequer, Norman Lamont and Kenneth Clarke, made savings in public expenditure funded half by tax and half by cuts.
But the public sector borrowing requirement (PSBR), needed to fund the government's activities not covered by income, has hit a record 163 billion pounds (about 225 billion dollars).
The coalition government has adopted the Conservative plans to start cutting the PSBR now.
The government's policy to start cutting the debt now received support from Mervyn King, governor of the Bank of England.
"The most important thing now is for the new government to deal with the challenge of the fiscal deficit," King told a press conference.
"It is the single most pressing problem facing the United Kingdom; it will take a full parliament to deal with, and it is very important that measures are taken straight away to demonstrate the seriousness and the credibility of the commitment to dealing with that deficit," he said.
King said he expected the government to secure recovery that was beginning to take place.
But he warned that the international financial markets response to the sovereign debt crisis, for instance Greece, indicated that they would be looking for a high price for loans.
"That, I think, has been a sobering reflection of what can happen if you don't make very clear at the outset... after the election they need and they want a very clear, strong signal and evidence of the determination to make it work," he added.
King said he did not believe the coalition government's plan to immediately cut 6 billion pounds (about 9 billion dollars) from public spending would harm the economic recovery that has been underway since the beginning of the fourth quarter of 2009.
"I don't believe that the scale of those measures, the 6 billion pound cuts, is likely to be such as to dramatically change the outlook for growth this year," King said.
Speaking after the end of the coalition government's first cabinet meeting, new Culture Secretary Jeremy Hunt said the government held the same views.
"We are all very aware of the seriousness of the situation and, frankly, if we don't have a credible program to reduce the deficit -- and at the moment Britain has one of the least credible programs amongst the developed economies -- then we won't have the confidence of the world and the confidence of the country," Hunt said.
"The encouraging thing is that I think there is an understanding across all parts of government that we have got to take very, very difficult decisions," he added.
Broadly, that means one thing -- painful adjustments in government spending. But the question remains, how will the adjustments be made? How much through tax? How much through cuts?
Some of the answers will be provided over the coming weeks as policy is fleshed out, and in Osborne's emergency budget./.