Government cuts need to be even tougher than pundits are predicting, according to the Institute of Directors.

And, in representations ahead of next week's emergency Budget, it warns the country is "at a fork in the road".

It cautions: "With the right decisions prospects for recovery in the short-term and economic growth in the long-term could be enhanced. But there is also a risk that the wrong decisions could hasten a double-dip recession and damage long-term competitiveness."

Deficit reduction, says the IoD, should be "deeper and faster than financial markets expect".

It insists:  "Closing the structural deficit alone is not enough. The overall deficit in public sector net borrowing needs to be almost eliminated - over the course of the Parliament.

"Deficit reduction needs to be overwhelmingly based on lower public spending. The IoD has consistently argued for a 4:1 ratio of spending reduction to tax increases. Ideally all of the adjustment should fall on spending but if taxes are to rise the focus should be on indirect taxation. Higher direct taxation in particular would risk a double dip recession and also undermine the long-term incentive to work, save and invest."

John Rider, IoD West Midlands regional chairman, said: "The Budget needs to set out a big deficit reduction package, but the nature of the package is just as vital as its size.

"Raising taxes significantly would ensure that we fail to get a strong private sector recovery, killing off the growth we are trying to create. Cutting public spending is the necessary course of action, and should be accompanied by measures to ensure that the resources lost in the public sector are able to be picked up by a strongly recovering private sector. 

"We don't think rapid deficit reduction based on lower spending will undermine economic recovery. At times of fiscal crisis the normal rules are switched off. There is very strong evidence from economic history over recent decades, that we can have an expansionary fiscal consolidation. The immediate direct impact of lower public spending is to lower GDP but indirect effects quickly kick-in to raise private sector spending. The silver lining here is that tight fiscal policy might help maintain near zero interest rates for years not months.

"The tough Lamont-Clarke fiscal tightening, with 600,000 public sector job losses in the mid 1990s, did not prevent sustained economic recovery. Also, the period of fastest economic growth under Labour was during its first two years in office, when public spending fell sharply as a proportion of GDP."

The IoD forecasts only 0.9 per cent GDP growth this year with just 1.9 per cent in 2011.