Chancellor of the Exchequer George Osborne should allow Britain’s public finances to deteriorate further if unemployment increases and the economy remains weak, the Organization for Economic Cooperation and Development said.
Gross domestic product will expand by 0.9 percent this year and by 1.6 percent in 2014, the Paris-based group said in a report published today. The projections are unchanged from its last report in November. Osborne should not seek to counter the impact of weak growth on tax revenue and welfare costs by tightening fiscal policy and the central bank should continue to loosen monetary policy if needed, it said.
“The fiscal stance remains appropriate,” it said. “However, if growth significantly underperforms expectations over the coming months, the flexibility of the fiscal framework should be utilized.”
The OECD is sticking with its endorsement of Osborne’s budget plans after the International Monetary Fund urged him last month to consider easing the pace of austerity if the recovery falters. General-Secretary Angel Gurria said today that any letup would risk Britain’s “high level of credibility” with investors.
“People see whether the program adds up roughly,” he told a news conference in London. “The U.K. program cleared it. What makes you lose credibility is when you may be off the program or not be committed to the same targets.”
Osborne’s plan, which is based on targets that strip out the effects of the economic cycle, has been attacked by the opposition Labour Party for sapping economic growth as the U.K. teeters on the brink of its first ever triple-dip recession. Osborne, who said in December that austerity will continue until 2018, three years later than planned when the Conservative-led government came to power in 2010, will present his new budget to Parliament on March 20.
The OECD said Britain faces a “slow and uneven” recovery from recession as budget cuts and the euro-region debt crisis weigh on growth. Unemployment will increase to 8.3 percent this year, while inflation-adjusted wages will grow just 0.5 percent, it said. Government consumption will shrink by 3 percent after growing for the last three years, it said. Private consumption will grow by 1.6 percent.
Amid such conditions, the OECD said monetary policy should remain the main lever of growth for the economy even though it is now providing “diminishing returns.”
“Sustained monetary stimulus through expanded quantitative easing, liquidity provision by the Bank of England and government-backed funding schemes need to continue to support the economy,” the OECD said. Options such as cutting the benchmark rate to zero and buying private securities “do not appear to have clear advantages over expanding QE” right now, it said.
The government may need to increase taxes after the next election or risk culling more than a million public-sector jobs by 2018, a separate research group said in a report today.
The Institute for Fiscal Studies said current spending plans imply an average cut of one third in unprotected government departments. If the squeeze on the wage bill continues after the 2015 election, the total number of jobs lost might reach 1.2 million by the 2017-2018 fiscal year, compared with the Office for Budget Responsibility’s current forecast of 900,000. There is also more than a 50 percent chance that the government will have to increase borrowing this year, it said.
The OECD said Osborne was right to let his debt target slip in his autumn statement rather than risk the recovery by tightening fiscal policy in a bid to keep it on track.