IoD warns of more cuts to meet budget targets

CHANCELLOR George Osborne may need to make further spending cuts to meet his budget deficit targets, according to the Institute of Directors' economic forecast for 2011.

The IoD forecasts GDP growth of just 1.2 per cent in 2011, as Britain faces a "very high" level of economic uncertainty.

According to the IoD, the recovery cycle appears to be taking the shape of a square root sign, with a temporary spurt in growth in 2010 set to level off in 2011.

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In a statement, the IoD said: "There is too much doom and gloom surrounding the Spending Review but there also needs to be greater realism about weakness elsewhere in the economy.

"If the IoD's GDP forecasts prove correct, the Chancellor may need to find more spending cuts or tax rises to meet his budget deficit targets.

"The presence of an output gap does not automatically lead to its closure."

The IoD warns that the experience of Japan in the 1990s shows that "below trend" growth can persist for so long it becomes the trend.

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Graeme Leach, the chief economist at the IoD, said: "After an extraordinary financial crisis, fiscal explosion and the introduction of unconventional monetary policy the level of economic uncertainty remains at a very high level.

"The effectiveness of traditional forecasting models – always questionable – is open to very serious doubt when they have little or no capacity to incorporate the effects of quantitative easing, and when the size and sign of fiscal multipliers is open to question in the wake of the financial crisis and exploding public debt and deficits.

"In such circumstances economic forecasting becomes what it always has been, an issue of feel and judgement."

Over the past year, the IoD has argued that economic recovery would be L-shaped, with a relatively gentle upward slope.

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The IoD statement added: "However, we have also argued that there might be a few quarters of stronger growth where the economy grows in line with a normal cyclical bounce back but the recovery then levels off.

"We called this the square root shape recovery.

"The evidence thus far in 2010 suggests the square root shaped cycle might be unfolding.

"We do not think the decelerating forces will lead to a double-dip recession – but the risk is there especially if business and consumer confidence begins to slide."

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