Cuts delay call amid growth fears


Chancellor George Osborne should consider delaying austerity cuts to support Britain's flagging economy, a report says

Chancellor George Osborne should consider delaying austerity cuts to support Britain’s flagging economy, according to a new report.

In its latest forecast, the National Institute of Economic and Social Research (NIESR) said there was a case for postponing some of the harsh spending cuts as it predicted the UK economy will grow by just 1.5% in 2011 – only marginally above its 1.4% growth last year.

But NIESR warned interest rates may have to rise as early as the spring to hold back soaring inflation, as it forecast that Consumer Prices Index (CPI) would rise to an average of 3.8% in 2011.

The report said that with the “lacklustre” economy operating at about 4% below potential, there was room to hold off on some of the Government’s austerity programme, adding this would be acceptable because borrowing costs are currently so low.

In recent days Prime Minister David Cameron has insisted that it would be a mistake for the Government to reverse its austerity measures even though the economy contracted by 0.5% in the final quarter of 2010.

With the future cost of caring for Britain’s pensioners spiralling, the report also said the Government should also consider a faster rise in the state pension age so that it reaches 68, rather than 66, by 2020. The surge in CPI is being made worse by soaring oil prices and will squeeze real disposable income by 0.8% in 2011, after a 1% reduction in 2010.

But NIESR gave credence to Bank of England Governor Mervyn King’s predictions that inflation will fall back again in 2012. It said CPI will drop to 1.8% next year because the recovery is so subdued.

The report predicts that the UK will grow in the first quarter of 2011 as it regains some of the output lost to the snowy weather in December. But the average growth rate across the final quarter of 2010 and the first quarter of 2011 will be just 0.1%, it added. While Government spending will fall in 2011, personal consumption will also drop by 0.1%, it predicted.

Shadow treasury chief secretary Angela Eagle said: “This report is yet another warning sign to a Conservative Chancellor who seems to be in denial. When Labour left office growth was picking up, unemployment was falling, inflation was low and the deficit came in over £20 billion lower than forecast.

“But the NIESR’s report shows that the economy has taken a turn for the worse since George Osborne made the choice to pursue a different course by cutting the deficit too far and too fast. This report predicts that economic growth is set to slow down and will be significantly lower than forecast since the Tory-led government’s emergency budget and spending review last year.”

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