The country's leading economic think- tank warns today that the Chancellor is cutting too fast – and that he will still miss his primary aim of balancing the budget by 2015.
The National Institute for Economic and Social Research said that there will be "no meaningful recovery this year," and that "the public finances will not improve as quickly as the Office for Budget Responsibility expects". Weaker growth, and in particular weak consumer spending, in the short-term, the think tank warned, are behind this. It also said that further spending cuts now would only make matters worse, and that some cuts should be postponed.
"Public sector borrowing will shrink by only 1 per cent of GDP in 2011-12," it said. "The Chancellor will miss his primary target of balancing the cyclically adjusted current budget by 2015-16 by around 1 per cent of GDP."
The warning comes just a day after the IMF said in its latest report on the UK that there are still "significant" risks to inflation, growth and unemployment with "turmoil" in the eurozone adding to the danger the government would have to react. While it backed the Government's austerity programme as "appropriate," if conditions deteriorated then "significant loosening of macroeconomic policies" would be needed, possibly including a temporary cut in VAT, as the shadow Chancellor Ed Balls has urged.
The NIESR report echoed those calls. "The Chancellor has time to address this and further consolidation should not be introduced now," it said. "Indeed, it remains our view that in the short term, fiscal policy is too tight, and a modest loosening would improve prospects for output and employment with little or no negative effect onfiscal credibility."
These bleak assessments – and a run of weak economic data including GDP growth of just 0.2 per cent in the second quarter – adds to pressure on the Bank of England's Monetary Policy Committee to launch another round of quantitative easing, the direct injection of money into the economy.Reuse content