THE state of the nation's public finances are in "dire shape", according to an authoritative study of 55 top UK economists.
And further pressures on the economy from the credit squeeze are likely to make 2008 the most difficult year for the economy since the dotcom bubble burst.
Because of the state of public finances, there are also fears that financial authorities wi
ll be unable to mitigate the downturn.
The annual study by the Financial Times analysed the views of economists from the City and academia, as well as five former members of the Bank of England's monetary policy committee, which sets interest rates.
In a damning assessment of the policies of Prime Minister Gordon Brown during the latter years of his time as Chancellor, nearly nine in ten of the economists think public finances are not in good order, meaning there is little leeway for discretionary tax cuts.
Martin Weale, director of the National Institute of Economic and Social Research, said: "The public finances are in very poor shape. HM Treasury has managed several years of self-delusion. No doubt it will explain that it did not foresee the credit crisis and use this as an excuse."
Howard Davies, director of the London School of Economics (LSE), added: "The 2007 Budget looks to have been too expansionary – and I said so at the time."
The survey showed deepening pessimism about the impact of the global credit squeeze.
Nearly two-thirds of the economists believe that house prices will fall in 2008 after five months of financial market problems.
Sir Alan Budd, provost of Queen's College Oxford and a former chief economic adviser to the Treasury, said: "I'm quite worried . . . mainly because some of the problems (in the economy] are unprecedented and don't seem to be responding to treatment."
There are fears that a widely-predicted housing market slump in the United States will have a knock-on effect in the UK.
The majority view was that as inflation will be kept under control by the wider economic pressures, the Bank of England should look to cut interest rates early.
While the effects of the credit squeeze are seen as the main risk to economic stability in the year ahead by 39 per cent of the economists, just short of a third think it is the bigger slowdown in the US, Europe and China that is the main hazard.
A fifth point to inflationary pressures mainly caused by the cost of oil and gas as the main threat, while 13 per cent said a weak UK housing market would be the main risk.
William Buiter of the LSE expects house prices to fall by up to 30 per cent in the next couple of years, although he is optimistic about the ability of the economy to deal with the price falls.
Richard Lambert, director general of the CBI, said 2008 would be a difficult year, but added that it is important not to exaggerate the risks and "talk ourselves into something much worse".
The full article contains 513 words and appears in Edinburgh Evening News newspaper.
