The Chief Secretary to the Treasury, Liam Byrne, has hit back at suggestions in a leaked European Commission report that the UK government's strategy for reducing the budget deficit is not ambitious enough.

The report, due to be published officially on Wednesday, predicts that the UK will fail to cut its deficit in line with European Union (EU) rules by the 2015 deadline.

EU rules stipulate that government deficits must be less than 3% of gross domestic product (GDP), whereas the UK's deficit is forecast to rise to around 12.6% of GDP this year. That would put its debt ratio on a par with Greece, though as ratings agency Moody's highlighted earlier this week, Britain's 'debt reversibility' potential is substantial, and far superior to that of Greece.

Sticking to the party line, Byrne said the 'EU has got the judgement wrong' and that if the government adhered to the EU's deficit reduction plans it would require a mixture of spending cuts and tax increases amounting to about $20bn, which would put the fragile economic recovery at risk.

Ken Clarke, the highly regarded former Chancellor of the Exchequer and current Shadow Business Secretary, predictably seized on the report's recommendations as an endorsement of the Conservative party's plans to tackle Britain's debt mountain.

Clarke said the UK needs to tackle its deficit promptly or 'interest rates will rise, unemployment will rise and there will be no economic recovery.'

The EU report put pressure on the pound in early trading on Tuesday with sterling dipping below $1.50 at one stage but the effect was short lived, as the pound rallied strongly against the dollar to show a rise of just under one cent against the greenback in lunchtime trading.

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