Economic freedoms were sharply reduced last year on massive spending and bailouts during the financial crisis, a trend that could imperil future economic prospects, the U.S.-based Heritage Foundation said on Wednesday.

The 2010 Index of Economic Freedom published by the Washington-based Heritage Foundation and the Wall Street Journal ranked the United States as the world's eighth-freest economy in 2010, down two places from the year before, while Hong Kong maintained its No.1 ranking for the 16th year in a row.

The index authors described 2009 as a mixed, sometimes nightmarish year for economic freedoms. While a cluster of countries, Australia, New Zealand and Singapore, garnered high scores, several of the world's top economies including China, the UK, and the United States floundered because of unsuccessful attempts to spend their way to prosperity.

If the policies in the United States don't improve in the coming years then I think we could see a continued slide in economic performance in the U.S. and that would have significant negative repercussions for the world economy as a whole, said Terry Miller, a director with the Heritage Foundation.

The index's premise is that a higher degree of economic freedom yields higher levels of prosperity and per capita income.

The index showed half of the world's major economies curtailed economic freedoms to some extent in 2009.

Miller added that the United States should not have bailed out a number of stricken banks over the past year, arguing that it would have been better to let market forces decide their fate.

I want the U.S. government to really back off -- I would prefer them to do nothing than what they're doing now because then I think we would get out of this crisis quickly and the market would adjust, added Miller, who said the United States' current spending woes were partly a spillover from the Bush administration.

The United Kingdom also fell in this year's index, to 11th out of the 179 countries graded.

China, meanwhile, a relative laggard on the economic freedom charts with a ranking of 140, saw its score drop given significant declines in investment and labor freedoms. The authors added that a massive lending spree by its banks was now exacerbating the risk of asset bubbles forming.

Singapore retained its second-place ranking, despite a relatively poor score in the financial freedoms category as a result of its bank restrictions.

Rank Economy Overall score (out of 100)

1 Hong Kong 89.7

2 Singapore 86.1

3 Australia 82.6

4 New Zealand 82.1

5 Ireland 81.3

6 Switzerland 81.1

7 Canada 80.4

8 United States 78.0

9 Denmark 77.9

10 Chile 77.2

11 United Kingdom 76.5