U.K. Chancellor of the Exchequer George Osborne should borrow more for spending on capital projects to boost a “weak” economic recovery, according to the National Institute of Economic and Social Research.
While the institute raised its 2013 economic forecast after better-than-expected first-quarter data, it said gross domestic product won’t recover its peak before the financial crisis until 2015. It would be “sensible” for the government to aim for a package of extra investment totaling about 2 percent of GDP, Niesr director Jonathan Portes said.
Osborne has drawn criticism from both the opposition Labour Party and the International Monetary Fund for refusing to ease his deficit-cutting program. While the economy grew 0.3 percent in the three months through March, Niesr economist Simon Kirby said “the growth rates we’re talking about are nowhere near what you’d describe as recovery.”
The institute sees the economy expanding 0.9 percent this year instead of the 0.7 percent forecast in February, it said in a report published in London today. Its 2014 and 2015 projections for 1.5 percent and 2.1 percent are unchanged.
“We don’t expect the U.K. to dip into a triple recession over the course of the next couple of years, but we do expect the economy to remain relatively weak,” Kirby said. “There are still significant risks out there.”
He said that with the yield on U.K. 10-year government bonds below 2 percent, Osborne should borrow more to increase spending in the near term and use a review of spending scheduled for June to re-evaluate longer-term investment.
“Investment in infrastructure and housing will have a significant impact on the U.K. economy, boosting demand,” Kirby said. “The government can finance additional investment in much-needed infrastructure at little cost. With an economy in such a depressed state, the fiscal multipliers are likely to be far higher than in normal times.”
Osborne is pursuing an austerity program that is set to continue until 2018 as he tries to narrow a deficit that totaled 7.8 percent of GDP in the last fiscal year.
Bank of England policy maker Ben Broadbent said yesterday that there are more signs of optimism in the economy than last year. Still, he said the recovery remains “a lot weaker than a normal recovery and weaker than even the average.”
The BOE’s Monetary Policy Committee left its target for quantitative easing and its key interest rate unchanged last month. The MPC will have new forecasts for economic growth and inflation at its next meeting on May 8-9.
Niesr raised its 2013 inflation forecast to 2.9 percent from 2.4 percent, citing the pound’s weakness and an increase in university fees. While that’s above the BOE’s 2 percent target and will curb consumer-spending growth this year, Kirby said the central bank is right to look through it.
Niesr also pushed back its projection of when policy makers will first raise interest rates to the second quarter of 2015 from the first quarter.