Davos 2011: Cameron sticking with 'tough' recovery plan

UK Prime Minister David Cameron has vowed to "see through" his plan for deep spending cuts despite fears of their impact on economic growth.

He said cutting the deficit would be "tough" but the economy would "bounce back" if the UK stuck to its course.

At the same event in Davos, Chancellor George Osborne said the UK must ignore "siren voices" urging a different way.

Labour have accused ministers of "arrogance" for proceeding with what they say are £20bn of cuts this year.

'Making progress'

After figures released earlier week showed the UK economy contracted by 0.5% in the last three months of 2010, Labour leader Ed Miliband said the government's cuts were "hurting but not working".

But in a speech to business leaders and politicians at the World Economic Forum in Davos, Switzerland, the prime minister said: "Given the traumas of recent years, the recovery was always going to be choppy."

He defended the pace of spending cuts, saying the deficit was "unsustainable" and it was essential for the government to be cutting borrowing at the same time as seeking to boost economic growth.

"It is going to be tough but we must see it through," he said. "The scale of the task is immense so we need to be bold in order to build this economy of the future. The British people know these things. They understand there are no short cuts to a better future."

The UK was already "making progress", he insisted. "Not long ago we were heading towards the danger zone where markets start to question your credibility.

"Yet in the past eight months we've seen our credit rating - which was on the brink of being downgraded - affirmed at the triple-A level. We've seen market interest rates - which were in danger of spiralling upwards - actually fall.

"All this has happened not in spite of our plan to cut the deficit, but because of it. That's why we must stick to the course we have set out."

The BBC's Business Editor Robert Peston said that while Mr Cameron may be applauded for spelling out the extent of the economic challenge facing the UK, the danger was that it might scare off foreign investors.

The coalition has been accused of lacking a "pro-growth" strategy, with outgoing CBI boss Sir Richard Lambert saying key decisions affecting business had been taken for political reasons and there was a "lack of vision" about the long-term shape of the economy.

'Blind faith'

London Mayor Boris Johnson, who is also attending the World Economic Forum, has urged the coalition government to signal a move away from what he called Labour's "miserable and anti-wealth creation" tax regime.

In an interview with the Daily Telegraph, the former Conservative MP claimed George Osborne agreed with him about the need to bring down taxes, suggesting that the chancellor might take action in his March budget.

He told the newspaper: "Can we endlessly go on with a tax rate that is higher than not just America and Japan but also France, Germany and Italy? All these countries we've always beaten on tax. We need to set a course for low tax."

Speaking in Switzerland, Mr Osborne said he wanted the UK to have the "most competitive business tax regime" of any Western country and promised "bold" action in March's Budget to encourage enterprise.

He hinted at changes to the tax system to stop the "steady stream" of companies moving their headquarters abroad and said profits from newly commercialised patents would be taxed at a lower rate from 2013.

"Our competitiveness has suffered a lost decade," he said. "This is why the coalition government will be just as bold in promoting enterprise as we have been in dealing with the deficit."

But union leaders said the chancellor's optimism about the economic outlook amounted to "blind faith".

"With the economy tanking even before the cuts and VAT rise start to bite, the chancellor must accept that his gamble has failed to pay off," TUC general secretary Brendan Barber said. "We desperately need a plan B for jobs and growth."