Pissarides Says U.K. Fiscal Squeeze Risks Causing New Recession

Oct. 12 (Bloomberg) -- Nobel economics laureate Christopher Pissarides said the U.K.’s budget cuts risk causing a double-dip recession and the government should lower taxes to spur demand and job growth, the New Statesman magazine reported.

“Deficit reduction is best done with spending cuts when the economy is recovering, not with higher taxes in a downturn,” Pissarides said in an open letter to Chancellor of the Exchequer George Osborne, according to an e-mailed release from the London-based magazine. “There is enough time in the life of this Parliament to achieve your deficit-reduction objective with a policy that is friendlier to job creation.”

Pissarides, a professor at the London School of Economics, said cutting the sales-tax rate to 17.5 percent from 20 percent or reducing National Insurance contributions for those on low incomes would “revive job creation and reduce unemployment.” He said a cut in the top income-tax rate is unlikely to have much impact on employment.

Data today showed U.K. unemployment rose to the highest in 15 years in the quarter through August. While Prime Minister David Cameron said the figures were “disappointing,” he said the government won’t scale back its deficit-reduction plan as that would “send our economy into a tailspin.”

“I know you worry about the deficit but I think that you worry about it too much,” Pissarides said in the letter to Osborne. The fiscal squeeze could “slow down the recovery and may even cause a double-dip recession.”

To contact the reporter on this story: Fergal O’Brien in London at fobrien@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net