UK economy: Cut taxes and borrow more, George Osborne told by think-tank

CHANCELLOR George Osborne should introduce a 2p cut in
National Insurance, borrow more and abandon his austerity strategy, a report from an economic think-tank warns today.

CHANCELLOR George Osborne should introduce a 2p cut in
National Insurance, borrow more and abandon his austerity strategy, a report from an economic think-tank warns today.

The report by the Institute for Public Policy Research (IPPR) claims that government cuts are worsening the recession by undermining confidence among businesses and consumers.

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Gross Domestic Product (GDP) figures are expected to show on Wednesday that the UK’s double-dip recession is

The IPPR report follows a similar
assessment of the UK economy last week by the International Monetary Fund.

And today a letter from First Minister Alex Salmond is expected to arrive on Mr Osborne’s desk echoing the IPPR’s calls.

The sluggish recovery from recession will see the UK’s 15-year GDP growth rate at just 1.7 per cent in 2015 – its lowest level since the Second World War and the equivalent of £165 billion in lost
output, the IPPR said. A two-year 2p cut in National Insurance would inject £14 billion into the economy and could be paid for by the introduction at a later date of a permanent mansion tax on homes worth over £2 million, said the report.

And the government could take advantage of historically low interest rates by borrowing £30bn for investment in infrastructure at a cost of just £150m a year.

The report called on Mr Osborne to ditch his plans to eliminate the national deficit within five years, and be prepared instead to increase borrowing in the short term and spread deficit reduction over a longer period.

Rather than creating a favourable environment for business investment, as the Chancellor claims, the IPPR said the government’s austerity measures hadmade companies and individuals reluctant to spend because of uncertainty about the future.

The left-of-centre think-tank’s chief economist, Tony Dolphin, said: “The government’s measures to tackle the deficit were predicated on the assumption that they would lead to greater confidence and certainty about the future; in fact, they have had the opposite effect.

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“The government should implement temporary tax cuts and a boost to infrastructure spending not offset by cuts elsewhere. This would mean borrowing more in the short term.

“Fears that more quantitative easing would increase the risk of higher inflation in coming years are misplaced. Inflation pressures in the UK in recent years have been imported and are largely the result of high commodity prices.

“Domestic inflation pressures, for example wage growth, have been very low, and this is likely to remain the case while there is a good deal of spare capacity in the economy.

“The time to worry about inflation is after the economy is restored to growth, not before.”

Mr Salmond’s letter to Mr Osborne followed criticism of the UK government’s economic strategy by the IMF last week.

The IMF assessment said: “The economy is expected to grow modestly, but with current policy settings the pace will be insufficient to absorb significant slack in the economy, raising the risk of a permanent loss of productive capacity.”

And in his letter, Mr Salmond said: “Scotland’s experience has been that a targeted stimulus to public-sector capital investment can boost jobs and keep pushing the recovery forward. However, the Scottish Government is still facing a 33 per cent real terms cut in our capital budget over the spending review period.

“What we need urgently is a direct injection of UK government capital spending into shovel-ready projects allocated across sectors such as renew­ables, tourism, transport and housing.”

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Mr Salmond added: “We have identified a range of new projects in Scotland which could start immediately, and I can guarantee that the additional £400 million-plus in consequentials from such a package would be spent during the current financial year.

“Such a move would provide an immediate boost to the economy, and help kick-start wider private-sector investment.”

But last night the government pointed out that just last week it had introduced another £50 bn stimulus package, mostly made up of cheap credit for businesses.

Ministers insisted that there must be no more extra borrowing, because the current crisis has been caused by debt.

A Treasury spokesperson said: “Tough decisions taken by the government on fiscal policy have created the space to support the economy through monetary activism, such as quantitative easing, and has also established credibility that has enabled firms and households to benefit from low interest rates.”

Shadow Chancellor Ed Balls said: “Rather than waiting for things to get worse, David Cameron and George Osborne must act now to get the economy moving, get people back to work and so get the deficit down”.