IPPR report urges temporary tax cuts and spending on infrastructure to boost investment from the private sector
The coalition government's economic strategy, intended to boost confidence and encourage investment, is having the opposite effect by deterring spending, a thinktank warned on Monday.
The sluggish recovery from recession will see the UK's long-term GDP growth rate drop to just 1.7% by 2015 ? its lowest level since the second world war and the equivalent of £165bn in lost output over 15 years ? according to the Institute for Public Policy Research (IPPR).
The report may well provide more food for thought for the chancellor, George Osborne, in advance of Wednesday's GDP figures which will show whether Britain lifted itself out of double-dip recession in the second quarter of 2012.
At the weekend, Boris Johnson, the mayor of London, urged greater emphasis on growth and appeared to contradict David Cameron's warning that the crisis in the eurozone could last up to eight years.
The International Monetary Fund has downgraded its forecast for UK growth to just 0.2% in 2012 and 1.4% in 2013.
The thinktank said that there needs to be a change in fiscal policy, featuring temporary tax cuts, additional infrastructure spending and further quantitative easing to boost demand and bolster anaemic investment from the private sector.
A two-year 2p cut in National Insurance would inject £14bn into the economy and could be paid for by the introduction at a later date of a permanent mansion tax on homes worth more than £2m, recommended the report. And the government could take advantage of historically low interest rates by borrowing £30bn for investment in infrastructure at a cost of just £150 million a year.
Using official statistics and Office for Budget Responsibility forecasts, the report calculated that by 2015 average growth over a 15-year period will have declined to 1.7%, compared to a historic average of 2.4% and a peak of almost 3.5% in the middle of the last decade.
The report called on Osborne to ditch his plans to eliminate the national deficit within five years, and be prepared instead to increase borrowing in the short term and spread deficit reduction over a longer period.
Rather than creating a favourable environment for business investment, as the chancellor claims, the IPPR said that the government's austerity measures have made companies and individuals reluctant to spend because of uncertainty about the future.
The thinktank's chief economist, Tony Dolphin, said: "The government should implement temporary tax cuts and a boost to infrastructure spending not offset by cuts elsewhere. This would mean borrowing more in the short term.
"Fears that more quantitative easing would increase the risk of higher inflation in coming years are misplaced. Inflation pressures in the UK in recent years have been imported and are largely the result of high commodity prices.
"Domestic inflation pressures, for example, wage growth, have been very low and this is likely to remain the case while there is a good deal of spare capacity in the economy. The time to worry about inflation is after the economy is restored to growth, not before," he said.
The report also called for a Jobs Guarantee of work at minimum wage levels for anyone unemployed for more than 12 months, at a cost of up to £2.5 billion a year, in order to boost demand and stop people dropping out of the labour market altogether.
Johnson urged greater investment in the economy and the encouragement of large capital projects to get the economy moving.
"I am worried that people are losing confidence and losing enthusiasm ... We need a more aggressive plan for more infrastructure," he told the Andrew Marr Show on Sunday.
He added: "There is a danger in overdoing the gloom. I don't think that this will go on for another eight years."
A Treasury spokesman said: "Tough decisions taken by the government on fiscal policy have created the space to support the economy through monetary activism, such as quantitative easing, and has also established credibility that has enabled firms and households to benefit from low interest rates.
"The government continues to look for ways to use this hard won credibility to support the economy, as seen in the recent announcements of the Funding for Lending Scheme and using guarantees to help investment in infrastructure, as it protects the UK economy from the ongoing uncertainty and instability in the eurozone."
www.guardian.co.uk/business/2012/jul/23/thinktank-questions-coalition-fiscal-strategy