Think tank calls for £20bn Budget boost for economy Budget

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Chancellor George Osborne has scope for temporary tax cuts of up to £20bn in his March Budget to boost growth in the UK’s stalled economy, a respected economic think tank has said.

The Institute for Fiscal Studies (IFS) said the case for cuts to either VAT or employers’ National Insurance contributions, as well as further increasing investment, was “stronger now than a year ago”.

Expectations of a fall in inflation later this year meant the Government could increase borrowing by around one per cent of GDP to fund a short-term fiscal stimulus, without triggering an increase in interest rates, said the IFS.

But the think tank warned any stimulus package must be “timely, targeted and temporary”.

There was a “strong case” against permanent tax cuts at this stage, it said, and any larger package would risk unsettling the bond markets and forcing up the cost of Government borrowing.

The Labour Party – which has been calling for a five-point plan to boost jobs and growth, including cuts in VAT and National Insurance contributions, as well as infrastructure investment – welcomed the IFS judgment, which is contained within its annual ‘Green Budget’.

Shadow Chief Secretary to the Treasury and Leeds MP Rachel Reeves said: “The independent IFS is right to say that the case for short-term action on jobs and growth – for example through the temporary tax cuts Labour has been calling for – is now stronger and will get stronger still if the eurozone crisis deepens.

“But rather than waiting for things to get even worse, George Osborne should take urgent action in next month’s Budget.

“Years of slow growth and high unemployment are not just bad for families and for the deficit, but also risk permanent damage to our economy.”

The IFS report predicted Mr Osborne will beat his deficit reduction target by £3bn in the current financial year – largely due to Whitehall departments underspending on their budgets.

But it said that prospects for 2012 remain bleak, with predicted growth of just 0.3 per cent – significantly lower than the 0.7 per cent predicted by the Office for Budget Responsibility.

John Walker, of Oxford Economics, which worked with the IFS on the report, said he was “certainly” expecting a double-dip recession, with negative growth in the current quarter expected to follow the recently-announced contraction in the last three months of 2011.

The IFS report also warned that a break-up of the eurozone could plunge the UK back into “deep recession”, with GDP falling both this year and next and unemployment soaring to a 20-year high.

A Conservative source highlighted figures in the report suggesting that debt would be £201bn higher by 2017 under the plans inherited from the last Labour government if it were not for Mr Osborne’s austerity package.

The Budget will be unveiled on March 21.