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%.
The growth in the UK economy over the next two years will come from a rebalancing in net trade as businesses “belatedly” take advantage of the weak pound to increase exports by 6.4% while imports rise by just 2.1%.
Imports will be subdued because domestic demand will grow by just 0.4% in both 2011 and 2012.
In 2012, net trade will make up 1.4% of the 1.8% growth in GDP as the government’s plans for an export-led recovery are realised.