Britain's government should postpone spending cuts or temporarily lower taxes to support a fragile economy, a leading think tank said today.
While the Bank of England may have to pump more money into the economy if it took a serious turn for the worse, the preferred stimulus was government spending, the National Institute of Economic and Social Research (NIESR) said.
In any case, the government should abstain from additional cuts beyond its announced austerity plan, even though it was likely to miss its goal to erase a deficit of some 10 per cent over the next five years, the institute's economists said.
"It remains our view that in the short term fiscal policy is too tight, and a modest loosening would improve prospects for output and employment with little or no negative effect on fiscal credibility," said director Jonathan Portes at the presentation of the think tank's updated forecasts.
Delaying the necessary fiscal consolidation was unlikely to dent the country's credibility with markets as Britain - unlike the troubled euro zone economies - was borrowing in its own currency, had its own central bank and very long debt maturities, he said.
The NIESR economists suggested temporary cuts in income tax or national insurance contributions as an alternative given the government's reluctance to deviate from its plan to cut spending.
Britain's finance minister George Osborne has rejected all calls for higher spending or tax cuts so far, saying that the government's commitment to austerity had secured low bond yields and made Britain a safe haven for investors.
Mr Portes, however, said the recent decline in gilt yields to all-time lows was a result of the economy's weakness as safe haven flows would have led to a rise in the pound or be accompanied by rising stock prices.
"The reason people are marking down gilt yields is because the economy is weak," he said.
GDP figures showed Britain's economy barely grew in the second quarter following six months of stagnation and surveys this week suggest the third quarter has not got off to a good start
NIESR continued to forecast a moderate pick-up in growth, lowering its 2011 growth forecast a notch to 1.3 per cent and left its 2012 prediction unchanged at 2.0 per cent.
This is below the forecast from the Office for Budget Responsibility - the government's independent budget watchdog, which predicts growth of 1.7 per cent for this year and 2.5 per cent for next.
Further clouds have appeared on the horizon since NIESR's last forecast update in April.
"The balance of risks is more heavily focussed on the downside compared to April," said NIESR economist Simon Kirby.
"The forecast is fragile to the extent that much of the downside risks is out of the hands of the UK, given that it is events in major export markets."
The government was set to miss its target to balance the cyclically adjusted current budget by 1 per cent of GDP in 2015-2016, NIESR said.
The think tank said UK inflation was set to ease from an average of 4.2 per cent this year to 1.9 per cent in 2012 and 1.8 per cent in 2013.
Reuters
