The National Institute of Economic and Social Research (NIESR) published the analysis as it slashed its growth forecast for this year from 0pc to a contraction of 0.5 per cent and warned that the recovery would not begin in earnest until 2014. Had the Government delayed austerity this year, the economy would have grown 1.2 per cent, NIESR estimated.
The research will pile more pressure on the Government to respond to the double-dip recession with a new growth strategy reports The Telegraph. Last month, the International Monetary Fund said the Chancellor would have to react in next March’s Budget if the economy has failed to bounce back by then.
Even if the Government is not prepared to delay austerity, NIESR said it should loosen its debt reduction plans and borrow more to pay for key infrastructure projects. “It remains the case that there is scope for a less aggressive path of fiscal tightening,” NIESR’s UK economist Simon Kirby said.
Weak growth is already undermining the Government’s attempts to bring down borrowing, Mr Kirby added. Despite the £18bn of tax rises and spending cuts planned this year, the deficit is expected to soar to £138.5bn – £18.5bn more than official forecasts and £12bn more than last year.
NIESR’s warnings followed the Bank of England’s decision to keep interest rates on hold at 0.5pc and leave quantitative easing (QE) unchanged at £375bn this month. Economists expect a rate cut and more QE in the coming months.
NIESR has been calling for the Government to go slow on austerity for some time, but has now quantified the possible gain from a delay.
Citing research showing that spending cuts and tax rises have a more damaging effect on growth if they are undertaken when the economy is depressed, NIESR calculated that up to 200,000 fewer jobs would have been lost if austerity had been delayed from 2011 to 2014.
Over the decade to 2021, the delay would deliver £239bn more economic output in total, NIESR claimed.
However, the Treasury took issue with NIESR’s assumption that the markets would not react to persistently higher borrowing. A Treasury source said: “Failure to deal with the deficit would make market interest rates significantly higher, which would damage the economy.”
NIESR added that the eurozone crisis will continue for another two years, slowing growth in the UK.
The Government was offered a rare ray of hope in yesterday’s construction figures. The purchasing managers index showed that the construction sector surprisingly returned to growth in July. The index rose to 50.9, from 48.2 in June, where anything above 50 indicates expansion.
