UK economy needs fiscal boost

Jan Harris | February 1, 2012 | 0 Comments

The UK economy needs a fiscal boost of £10 billion to £20 billion in order to avoid another recession, a leading think tank said today.

In its annual Green Budget, The Institute for Fiscal Studies calls for Chancellor George Osborne to include a short-term fiscal stimulus in his budget.

This would buffer the UK economy against the eurozone crisis and the possibility of another recession which could see GDP falling in 2012 and 2013, and a substantial increase in national debt.

The stimulus could take the form of a temporary reduction in employers’ National Insurance contributions or VAT, or could be achieved by increasing investment spending.

‘Should the eurozone break up, or the economy do much worse than forecast for other reasons, then future borrowing would be increased and one - or both - of the Chancellor’s fiscal targets would be broken,’ the IFS said.

The think tank has cut its forecast for UK economic growth to just 0.3 per cent, substantially lower than Government’s 0.7 per cent target.

The report claims that the scale of the government’s austerity strategy is “almost without historical or international precedent” but by the end of the current financial year only 6% of the cuts will have been implemented.

The government is expected to beat its 2011/12 deficit reduction target of £127 billion by £3 billion.

IFS director Paul Johnson said: “The Chancellor faces his third Budget with the economy and public finances in considerably weaker shape than he had hoped a year ago.

“While it looks as though central Government is going to underspend against tight spending plans, this neither leaves much space for any permanent fiscal loosening nor avoids the fact that the vast majority of the planned - and unprecedentedly big - public service cuts are still to come.”

There was also some good news on the economy today, with Markit’s/Cips’ purchasing managers’ index (PMI) revealing that the UK manufacturing sector has returned to growth.

In January, activity in the manufacturing sector was at its highest level for eight months, reaching 52.1 points on the PMI index, where a reading above 50 indicates growth.

This represent a significant improvement from 49.7 in December, with manufacturing output and new orders increasing while manufacturing costs fell.

Tags: austerity cuts, economic growth, fiscal boost, manufacturing sector, recession