Chancellor George Osborne should ditch an austerity programme which has resulted in a "malnourished" British economy, a former Bank of England rate-setter warned today.
American Adam Posen, who served on the Bank's Monetary Policy Committee until September, spoke out after years of frustration over the Coalition's "self-defeating" deficit-cutting strategy and failure to encourage investment.
Mr Posen, who stepped down to become president of the respected Peterson Institute for International Economics next year, was a consistent supporter of quantitative easing during his time on the MPC, winning over his colleagues in October 2011.
The outspoken criticism is an embarrassment for the Chancellor coming so soon after Mr Posen's departure from the Bank. Writing in Prospect magazine, Mr Posen said: "For two and a half years, the Coalition Government's economic policies have focused on the wrong narrow goal, been self-defeating in pursuit of that goal, and in so doing have eaten away at British economic capabilities and confidence. It is past time for me, and far more importantly for the Chancellor, to say so."
Mr Posen attacked the Coalition for failing to encourage capital investment, in contrast to international rivals such as Germany, France, Japan, and the United States. He called for the Chancellor to stimulate the supply side of the economy as well as supporting demand through major infrastructure projects.
He set out a five-point plan to revive the economy with "aggressive" tax credits for business investment, which has fallen far below the expectations of the Government's Office for Budget Responsibility fiscal watchdog. He also called on the Government to create a far more diverse credit market to enable small businesses to rely on more sources of funding than just banks.
He also labelled the lack of competition in the banking sector in the UK market as "extraordinary", as well as calling for the creation of a small business bank. The Chancellor should ratchet up spending on major infrastructure projects, Mr Posen argued.
He warned: "It is not enough for Messrs Cameron and Osborne to claim that they have done what they promised to do. Their policies have left the British economy malnourished, and indeed made parts of it quite ill. There are alternatives available, and the British Government should switch to these now."
The economist also had a broadside for the Bank for "scaremongering" over the need for spending cuts, adding that the committee risked feeding "the policy defeatism and austerity cycle" damaging the economy.
The Treasury declined to comment on Mr Posen's analysis, although sources pointed to the Chancellor's temporary two-year rise in investment allowances to £250,000 in the autumn statement.
* Spencer Dale, the Bank of England's chief economist, warned of more wage pain to come after official figures showed average growth in salaries remains at 1.8 per cent. This is in effect a real-terms cut for workers when the consumer prices index inflation benchmark stands at 2.7 per cent.
Mr Dale said wages had fallen 15 per cent in real terms compared with the pre-crisis trend. He warned: "Although real wages have fallen sharply, it seems likely there is still a little further to go in adjusting to the shocks that we have seen so far."
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