Think-tank says austerity is harming UK growth and employment

The National Institute of Economic and Social Research (NIESR) says that the UK economy will contract by 0.5 per cent this year and then grow by 1.3 per cent in 2013 and by 2.4 per cent in 2014.

NIESR says that had the austerity measures been delayed from 2011 to 2014, the economy would have delivered £239 billion more economic output and a200,000 jobs could have been saved

The think-tank also warns that austerity measures may have cost the UK's GDP up to 16.5 per cent in cumulative economic growth. 

NIESR has cut its growth forecast from zero to a contraction of 0.5 per cent and states that had the austerity measures been delayed this year, the UK economy would have grown steadily. The report calls for investment in key infrastructure projects.

The research paper says that even with delaying the cuts, the government could meet its target of eliminating the current budget deficit by 2016-17 because even though borrowing this year will exceed the borrowing estimate given by the Office for Budget Responsibility (OBR), this is “largely a cyclical rather than a structural phenomenon.”

The research will increase the pressure on the government to come up with a coherent growth strategy. This sentiment was expressed by the International Monetary Fund (IMF) last month when it warned that new measures for growth would be required if the economy is not growing by early 2013.

Despite £18.5 billion extra cuts being made in 2012-13, the deficit is expected to increase by £12 billion to £138.5 billion.

NIESR criticized the UK’s “unreconstructed” banking system and said that initiatives to support demand, such as the Funding for Lending scheme, though welcome, were badly designed which “means significant deadweight losses are likely.”

NIESR estimates that the economic impact of the Queen’s Diamond Jubilee will be zero, with the 0.4 per cent of economic growth lost due to the extended bank holiday in the 2nd quarter, made up in the third quarter.

NIESR’s research warns that the UK economy has been essentially flat for the past two years and that this is due to mainly domestic factors.

The research supports a change of tack from the government and says delaying the austerity programme by three years would have led to growth of 1.2 per cent this year and helped to put 200,000 people back to work.

NIESR criticizes the government’s “piecemeal” approach to the economy and called on the government to come up with “a clear plan” for the overall financial infrastructure of the UK economy.

NIESR warns that “private sector adjustment has been exacerbated by fiscal consolidation and a dysfunctional financial system.”

The research estimates that unemployment will rise slightly from its level of 8.1 per cent of the working population to peak at 8.6 per cent in 2013. The analysis acknowledges that the UK, like Germany, has experienced very weak levels of productivity growth despite a “relatively strong” labour market.

NIESR estimates that inflation will fall below the government’s target of two per cent before the end of 2012. The consumer prices index measure of inflation is currently at 2.4 per cent after falling rapidly on the last few months.

The report warns that economic growth in the UK will be constrained by weak global demand, particularly in the euro area.

NIESR’s UK economist, Simon Kirby concludes that: “It remains the case that there is scope for a less aggressive path of fiscal tightening. The government should consider on-balance sheet funding of key projects, concurrent with a comprehensive restructuring of banks and key funding markets.