Osborne warned to ditch 'self-defeating' austerity

The Chancellor George Osborne should ditch an austerity programme which has resulted in a "malnourished" British economy, a former Bank of England rate-setter warned.

The 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.

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 to say so."

Mr Posen attacked the Coalition for failing to encourage capital investment. 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 Office for Budget Responsibility. 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.

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.

Mr Posen said the policies of David Cameron and George Osborne had "left the British economy malnourished, and indeed made parts of it quite ill".