Think-tank urges ‘modest loosening’ in fiscal policy

Two days after the International Monetary Fund warned of a “bumpy and uneven recovery”, the National Institute of Economic and Social Research (NIESR) today calls for a “modest loosening in fiscal policy” to help the economy.

It said it expects GDP to rise by 1.3 per cent in 2011, its second downward revision this year as consumer spending falls by more than previously thought. In its last forecast in May it predicted growth of 1.4 per cent but it said today that weaker spending will “hinder any meaningful recovery” this year.

The organisation believes Mr Osborne is set to miss his target of eliminating the budget deficit by 2015/16 as tax revenues are hit by the weaker spending and growth.

But it said he could loosen policy in the near-term to stimulate growth without losing credibility and would still have time to narrow the gap nearer the deadline.

The report comes as the Bank of England is tomorrow expected to leave interest rates at their record low of 0.5 per cent after economic growth in the UK slowed between April and June.

NIESR said GDP growth will pick up in the second half of 2011 but it now expects consumer spending to fall by 0.8 per cent in 2011, compared to its previous prediction of a 0.6 per cent drop.

It still expects GDP to rise by two per cent next year but warned that growth will be reliant on exports this year and next amid weak domestic spending.

Unemployment will rise to 8.3 per cent in 2012, up from 7.9 per cent this year, with further lay-offs expected if workers demand more pay, it said.

However, there was good news for cash-strapped consumers as it said that inflation will fall back from 4.2 per cent this year to 1.9 per cent next year, which is roughly in line with the Bank of England’s forecast.

The report follows the IMF’s warning that Ministers must be ready to change economic policy if growth and inflation do not develop as they hope.

The IMF gave its backing to the Government’s policy of “fiscal consolidation” to cut the deficit through tax hikes and spending cuts, backed by low interest rates set by the Bank of England.

But the international finance body warned that the growth outlook was “subject to considerable uncertainties”, and predicted a GDP hike of just 1.5 per cent this year and 2.5 per cent in 2012 – slightly below the forecasts from the Office for Budget Responsibility at the time of Mr Osborne’s budget in March.

Angela Eagle, Labour’s shadow chief secretary to the Treasury, said there is growing evidence that George Osborne’s “rash plan” to reduce the deficit is not working and called on the Government to build more affordable homes as well as reversing the VAT rise.