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NIESR: Chancellor should tone down austerity measures

Katie Holliday
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Katie Holliday

The National Institute of Economic and Social Research (NIESR) has called on the government to loosen its debt reduction plans as growth forecasts are slashed for the UK.

The think-tank forecasts a contraction in the UK economy this year of 0.5%, down from an initial estimate of zero growth.

It also warned the recovery would not begin in earnest until 2014, as the deterioration of the UK economy becomes “more pronounced than expected”.

However, NIESR said had the government delayed austerity this year, the economy would have grown 1.2%.

Delaying the austerity programme by three years would also put 200,000 people back into work and raise economic growth by £239bn over a decade.

Even if the government is not prepared to delay austerity, NIESR said it should loosen its debt reduction plans and borrow more to pay for key infrastructure projects.

“It remains the case there is scope for a less aggressive path of fiscal tightening,” NIESR’s UK economist Simon Kirby said.

NIESR said UK growth will be constrained by weak demand in the global economy and particularly the euro area, although unemployment is expected to peak at 8.6% in the second quarter of 2013.

Growth is then estimated to rebound to 1.3% in 2013 and 2.4% by 2014, the report said.

According to NIESR, the continued weakness of the UK economy reflects both a lack of demand and the supply-side constraint of an unreconstructed banking system.

As a result, it welcomed policy announcements which support demand, although it criticised the design of some schemes for prompting deadweight losses.

“Having a clear plan for the financial infrastructure the UK economy requires would be far better than this piecemeal approach.”

Global economic growth will slow to 3.3% for 2012 and 3.7% for 2013, according to the report, while all major economies are set to opt for near zero interest rates and fiscal tightening policies.

“World growth is forecast to be below trend this year and next, which means that unemployment will rise further and inflation will remain moderate,” it said.

NIESR said it expected remarkably low levels of official interest rates to continue well into next year.

“Central bankers are often fond of saying they have plenty of other weapons in their armoury should it be necessary. If this is the case, the current time would seem to be appropriate to use them.”

On the eurozone crisis, NIESR’s central forecast is the EMU will remain intact, given the political commitment.

“The prevarication of the past four years can no longer continue. Since Germany is the largest underwriter of the European Financial Stability Fund and the European Central Bank, there is a clear financial link between the economics and politics in Southern Europe and contingent liabilities in Northern Europe.

“We expect Italy and Spain will need some form of support from the Troika to keep sovereign bond markets open.”

NIESR also forecasts next year’s ‘fiscal cliff’ will shave 4% off US GDP  growth in 2013.

“The stakes are needlessly being raised by another round of political chicken in the US. Like everyone else we expect an adjustment to the existing legislation to prevent a fiscal tightening of close to 4% of GDP. If we are wrong, the US is likely to face another recession.”