Chancellor of the Exchequer George Osborne could safely implement a “significant” fiscal stimulus to spur the British economy amid signs that borrowing will be lower than estimated, the Institute for Fiscal Studies said.
“The case for a significant short-term fiscal stimulus to boost the economy is stronger than it was a year ago,” the London-based research group said in a report today. “There seems little prospect that it would prompt an offsetting monetary tightening in the present climate.”
The proposal is a challenge to Osborne’s austerity program, which he says is necessary to keep interest rates low and insulate the U.K. from the sovereign-debt crisis sweeping the euro region. Risks to the economy and the government’s fiscal targets “are very much on the downside,” leaving little scope for a permanent loosening through tax cuts or higher spending, the IFS said.
By 2017, Osborne will borrow 9 billion pounds ($14.2 billion) less than government forecasts suggest, the IFS said. The deficit in the current fiscal year, which ends in March, will be 2.9 billion pounds lower than the 127 billion pounds estimated, thanks to a spending undershoot of more than 3 billion pounds, the IFS said.
“A small fiscal loosening would be likely to deliver only a small boost to the economy, while a big one might risk undermining investor confidence,” the IFS said in its annual Green Budget. Osborne is due to present his budget on March 21.
Today’s report was produced together with Oxford Economics, which predicts the economy will expand 0.3 percent this year, less than half the 0.7 percent forecast by the Office for Budget Responsibility in November. The composition of growth will be more “tax-rich,” though, meaning its fiscal forecasts are similar to those of the OBR, the government’s fiscal watchdog.
If the euro-region debt crisis was allowed to spiral out of control, it could plunge the U.K. back into a “deep recession,” with output falling this year and next, causing national debt to soar, the research group said.
The IFS urged the government to hold its next spending review no later than the fall of 2013 “given the scale of the changes being implemented, the uncertainty over the effects of the cuts and the need for long-term planning.”
Osborne is aiming to rid Britain of a budget deficit equal to 9 percent of gross domestic product by 2017. His 147 billion- pound ($233 billion) austerity program will cost more than 700,000 government jobs. Critics including the opposition Labour Party say the scale of the squeeze is worsening Britain’s economic woes.
The Treasury said the IFS report vindicated the plans. “The IFS says that tackling the deficit is necessary, that without the government’s deficit plan borrowing would be much higher, and that any fiscal stimulus big enough to make a difference would undermine investor confidence and so risk higher interest rates,” the department said in a statement today.
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