The UK economy is running markedly under its potential, and the Government should reconsider its planned spending cuts, a leading think-tank has claimed.
The National Institute of Economic and Social Research (NIESR) has argued that the economy is functioning at about 4 per cent below its true capacity and that there are strong reasons for delaying at least some of the planned government spending cuts.
There is also scope for raising the state pension age in order to encourage growth.
As part of its quarterly growth forecast, the NIESR said: “Given that margin of spare capacity, there is a case for promoting the recovery by postponing at least some of the austerity programme.
“As an alternative to swift consolidation, the Government could raise the state pension age faster so that it reaches 68 rather than 66 by 2020.”
Lifting the state retirement age, so that it adds three years to each working life, would push up UK growth by 0.3 per cent a year for a decade. This is because the labour force would increase in size and savings set aside for retirement would remain in circulation.
The NIESR’s immediate economic forecast was downbeat.
It predicted that the UK economy will expand by just 1.5 per cent in 2001 and only by 1.8 per cent in 2012. Inflation will average 3.8 per cent this year, before falling back to 1.8 per cent next year.
The report also suggested that the Bank of England will look at increasing interest rates later in 2011 to head off inflation fuelled by the price of energy.
But the NIESR report warned that tighter monetary policy would add to the need for a looser fiscal policy.
Ray Barrell, the NIESR’s acting director, said: “It is likely we will have to face the political reality that some cuts are just not possible in the timetable set out by the government, but ministers should relax and rather than go looking for other things to cut, just let the process take a little longer.
“There is no point dashing about in a hair shirt in the snow, it’s only going to make matters worse.”