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Leading thinktank National Institute of Economic and Social Research calls on chancellor to loosen austerity programme One of Britain’s leading economic thinktanks warned the chancellor on Wednesday that he is on course to miss his ambitious forecasts for slashing Britain’s budget deficit. The National Institute for Economic and Social Research (NIESR) urged George Osborne to rethink his austerity programme and to use targeted tax cuts to boost demand, as a “meaningful recovery” continues to elude the economy. In its quarterly report on Britain, NIESR said public finances would not improve as quickly as the Treasury expected. “Weaker growth, and in particular, weak consumer spending, are behind this.” Osborne has announced plans to balance public spending on the day-to-day running costs of government, allowing for growth, by 2015/16. But NIESR said this target would be missed by 1% of GDP, about £15bn. “The chancellor has time to address this, and further fiscal consolidation should not be introduced now,” NIESR said. “It remains our view that in the short term, fiscal policy is too tight, and a modest loosening would improve prospects for output and employment with little or no negative effect on fiscal credibility.” Labour seized on the recommendations, to attack the government. Angela Eagle, the shadow chief secretary to the Treasury, said: “The evidence is growing that George Osborne’s rash plan is not working. The cautious thing to do is to act now before it’s too late. The reckless thing to do is to plough on regardless, as this chancellor seems determined to do.” Reducing its previous April growth prediction from 1.4% to 1.3%, NIESR said the sluggishness of UK growth was due to a dearth of domestic demand. The main cause of this is a combination of both private and public deleveraging as households and companies begin to pay off excessive debt racked up in the boom years, while a front-loaded austerity drive sees the chancellor enthusiastically attempting similar public debt reduction. NIESR said the deficit reduction programme was also having a marked impact on activity, and would knock 0.8 percentage points off growth in 2011. It added that Britain would be heavily reliant on exports to prevent the economy from stalling altogether, helped by the cheap pound. But the thinktank forecast that household incomes, which fell last year by 0.8% – the first drop since 1981 – would drop by a further 1.1% in 2011. “Wage growth has failed to keep up with an elevated rate of inflation and tax increases,” it said. The review predicted that falling inflation would lead to a pick-up in real incomes in 2012, but that consumers were highly vulnerable to an increase in borrowing costs. Growth would be cut by a third of a percentage point were the Bank of England to push up bank rates from 0.5% to 1%, NIESR said. Unemployment is expected to rise this year to 7.9% and again next year to 8.3% as firms begin to lay off workers that were ‘hoarded’ during the recession. Budget deficit Economics George Osborne Economic policy Conservatives Larry Elliott guardian.co.uk