Were austerity cuts too much, too soon?

Another think tank says the Coalition's deficit reduction plans are over-ambitious, and suggests loosening austerity measures. Probably won't go down well at No 11...

by Emma Haslett
Last Updated: 06 Nov 2012
 Has George Osborne been too harsh with his austerity measures? The National Institute of Economic and Social Research seems to think so – it’s published a damning report into the state of the economy which suggests that the Chancellor and his colleagues at the Treasury might have been a little bit on the optimistic side when it came to setting its target to eliminate the structural deficit by 2015-16.

The NIESR report pointed out that UK growth has been ‘stagnant’ over the past nine months – and added that it isn’t likely to see any ‘meaningful’ recovery over the next year. As a result, by 2016, Osborne and co (or his successors) will miss their target by about 1% of GDP, if there’s no change of tack.

The report also takes issue with Osborne’s (rather breezy) assertion that Britain is a ‘safe haven in the financial storm’. The Chancellor made the comment after interest in Government bonds plummeted to 2.75% - an ‘all-time low’. Osborne took that to mean investors think of UK Government debt as low-risk, compared with its decidedly shaky eurozone neighbours (more on that in a minute) – but the report counters that, saying people are actually marking down gilt yields ‘because the economy is weak’. (Incidentally, if you’re put off by gilts’ low yields, gold prices are at an all-time high this morning. Just a thought…).

Among the other damning predictions are the suggestion that unemployment is set to rise, from 7.9% this year to 8.3% next year (although, admittedly, that’s lower than the NIESR’s prediction in April that it would peak at 8.7%), while productivity will continue to drop. And while public sector borrowing will shrink over the next year, that’ll make it harder for Osborne to eliminate that deficit. Even scarier is the suggestion that if the Bank of England raises interest rates by a mere 0.5% over the next year, £6bn will be slashed from people’s disposable incomes.

On a slightly more positive note, the report also said it expects inflation to fall from 4.2% this year to 1.9% next year – below the 2% target set by the Government. Which means a) no more awkward letters from BoE governor Mervyn King to the Chancellor, and b) that King’s long-held (and much-maligned) belief that inflation would sort itself out is beginning to ring true…

Still: at least Osborne can take solace in the fact that however bad things get over here, chances are they won’t be as bad as in certain parts of the Eurozone, countries of which are dropping like flies (or flying PIIGS, at least) at the moment. Italy is the latest once-great nation to enter into crisis talks with the Eurogroup of finance ministers (the Eurozone’s equivalent of village elders), after the cost of borrowing for its government reached levels dangerously close to the 7% that proved unsustainable for Portugal, Greece and Ireland.

Silvio Berlusconi is due to address parliament today to calm things down – but in the meantime, markets have been decidedly jittery, with the FTSE 100 dropping as much as 1.1% as traders became increasingly worried about the state of the Euro. Looks like it’s a case of recreating some order and trying not to be distracted by bunga-bunga parties – or the other two court cases he currently faces, as Italy approaches Ferragosto and the whole place shuts down…

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