Tighter fiscal policy needed for weak UK

BESET by fiscal troubles and subdued consumer spending, the UK economy will only manage to grow by one per cent this year before picking up slightly in 2011 and 2012, the National Institute for Economic and Social Research (Niesr) will say today in its latest raft of forecasts.

The think-tank expects that four-fifths of this year’s GDP growth will come from a slower pace of destocking while consumer spending is to grow by a marginal 0.3 per cent.

Growth in 2011 and 2012 will be below-trend at two and 2.2 per cent respectively as fiscal retrenchment holds back growth prospects.

The think-tank says that fiscal retrenchment is necessary just to lower government borrowing to below three per cent of GDP by 2020: “It would be wise to consolidate the debt stock faster and reduce the deficit by two per cent of GDP a year on average over the decade,” it said.

It suggests achieving this through raising taxes by one per cent of GDP and cut spending by a further one per cent of GDP from 2011. “Although output would initially slow by 0.1 per cent a year for three to four years, it would be higher in the long-run as borrowing costs would fall for everyone.”

However, while the threat of a sovereign debt downgrade in the UK is foremost in many people’s minds, the think-tank said that this was not the main reason for the additional deficit reduction.

“This is required less because of worries about possible debt downgrades and rising risk premium on government borrowing and more to create fiscal headroom to deal with a possible future crisis and to reduce the long-term burden of the national debt,” its economists said.

The Niesr also predicts that unemployment will peak at 2.7m in 2011, when the jobless rate will reach 8.7 per cent.

At a world level, the economy is forecast to grow by almost four per cent this year, powered by China. It predicts that the US and Canada will return to previous peak levels of output by the end of 2010.