Cuts will hurt but avert bigger pain - Cameron

LONDON Sun Jun 6, 2010 10:16pm BST

Prime Minister David Cameron leaves Workington police station in Workington June 4, 2010. REUTERS/David Moir

Prime Minister David Cameron leaves Workington police station in Workington June 4, 2010.

Credit: Reuters/David Moir

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LONDON (Reuters) - Prime Minister David Cameron will tell Britons Monday that "painful times" lie ahead as the government cuts public spending, but this will protect them from the risk of higher interest rates.

Cameron is keen to prepare the public for an emergency budget due to be unveiled on June 22, which is expected to give details of cuts the government says are necessary to reduce a budget deficit running at about 11 percent of national output.

"I want to set out for the country the big arguments that form the background to the inevitably painful times that lie ahead of us," Cameron will say in a speech Monday, according to excerpts released to media by his office Sunday.

He will try to explain "why the overall scale of the problem is even worse than we thought and why its potential consequences are therefore more critical than we feared."

The excerpts provided did not elaborate on that comment, although Cameron signalled in an interview published earlier in the Sunday Times newspaper that the growth forecasts inherited from the previous government may be revised downwards.

"There were two levels of optimism in what the (previous) government was forecasting. One was trampoline growth of 3 percent (in 2011) and above, and the second theory was that interest rates would also stay low," he told the newspaper.

He also said that welfare bills, public sector pay and the cost of bureaucracy were among areas where the axe may fall.

Cameron and his chancellor, George Osborne, have often repeated that the bulk of the deficit reduction effort should come from spending cuts rather than tax increases.

However, there has been widespread speculation that the emergency budget would include an increase in the rate of Value Added Tax and Cameron did not rule that out.

SPENDING REVIEW

In his speech, he will say that a failure to cut the deficit would hurt Britain because if creditors started to worry about getting their money back, confidence in the economy would falter, investment would drop and interest rates would rise.

"The real, human, everyday reason this is the most urgent problem facing Britain is that higher interest rates hurt every family and every business in the land. They mean higher mortgages and lower employment."

Osborne and Treasury number two Danny Alexander will present Tuesday the framework for a spending review this year.

A Treasury source said the review aimed not only to save money but to "throw open the doors (of government) and encourage new thinking." This would "revolutionise government and provide the high quality public services people deserve."

"Anyone who thinks the spending review is just about saving money is missing the point. This is a once in a generation opportunity to transform the way government works. That will come through loud and clear later this week," the source said.

The Treasury is expected to open up the spending review process to consultation with the private sector, voluntary organizations, trade unions and the general public..

(Additional reporting by Matt Falloon; Editing by Charles Dick)

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