There is a risk that lack of financial confidence could spread across the European Union and affect previously untouched countries, Britain's chief secretary to the Treasury David Laws has said.

Laws, a Liberal Democrat, holds the number two Treasury job in a coalition government led by the Conservative Party that took office two weeks ago. The government has announced spending cuts worth 6 billion pounds this year to tackle the deficit.

"Even in this morning's news and over the last few days, we see the very real risk that the lack of financial confidence could spread across the European Union and could engulf even some of those nations who have not been affected to date," Laws told parliament during a question and answer session.

Britain posted a budget deficit of 156.1 billion pounds, close to 11 percent of GDP, for the fiscal year 2009-2010. Financial markets have been keen to see quick and decisive action to improve the public finances.   

In Britain's case, Laws said, "there was a real risk had we not acted to maintain the credibility of our fiscal policy, that we could have seen a big rise in interest rates that would have gobbled up additional expenditure and also helped to wreck the recovery that is now taking place."    
In the run-up to the May 6 election, the Liberal Democrats argued against cutting public spending this year on the basis that it would jeopardise a fragile recovery from the worst recession since World War Two.   

Asked why he had changed his mind in government about the timing of cuts, Laws said it had now become clear to him that action was needed quickly to avoid difficulties on the markets.

"Anyone would know ... just how much the international situation has worsened over the last couple of months, just how much the sovereign debt risk means that countries that are seen not to be taking action on their public finances are at risk of having an adverse reaction in the international markets," he said.

"Had we had that, the consequence inevitably of that loss of confidence would have been difficulty in auctioning the gilts that we have to sell to fund this deficit," he said. - Reuters