Economists tell Chancellor to change course

Leading think tank warns today that George Osborne will miss the borrowing targets he has set himself
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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, are behind this, the think tank warned. 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," the NIESR 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 the 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 – add to the 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. The MPC will announce its decision at noon tomorrow.

Like the IMF, the NIESR sees the weak state of the property market and the indebtedness of many households as a significant risk to their standard of living and wider economic stability. A half percentage point hike in interest rates, said the NIESR, would knock a third of a percentage point off real income growth next year – significant when wage growth is falling so farbehind inflation and tax rises. The economy will expand by 1.3 per cent this year, accelerating to 2 per cent per annum in 2012, it predicted. The CPI inflation rate will fall from 4.2 per cent per annum this year to a below-MPC-target 1.9 per cent in 2012, it added.

One brighter spot identified by the NIESR is the "remarkable" growth of employment in the circumstances,confirmed in a separate survey by the Recruitment and Employment Confederation today. Employment is now only 1 per cent off its pre-recession peak, according to the REC/KPMG Report on Jobs. Staff appointments increased at subdued pace in July, the study shows, with "modest rises in permanent placements and temporary billings". However, demand for staff is growing at its slowest pace in eight months.

Encouragingly for the MPC, there is still scant evidence of inflation fuelling successful pay demands; growth has quickened but remains "muted" and below the survey's long-run average.

However, the volatile construction sector is shedding staff, the Chartered Institute for Purchasing and Supply said yesterday, though building activity "expands at a solid pace".