The British economy will shrink by 0.5 percent this year, forcing Chancellor of the Exchequer George Osborne to miss his budget-deficit target, the National Institute of Economic and Social Research said.
The deterioration has been “even more pronounced” than previously forecast as private-sector retrenchment is made worse by fiscal consolidation and a “dysfunctional” financial system, the London-based research group said a quarterly report published yesterday.
Osborne will borrow ￡12.5 billion (US$19.5 billion) more than planned in the year through March next year, the institute said.
“All these factors will be a major drag on economic performance,” Simon Kirby, an economist at the institute, said in an interview. “The major problem in the UK economy is a lack of demand and the government can do things to boost demand.”
Osborne says he will resist the “siren calls” to borrow more money to underpin the economy, saying investors would turn on the UK in an echo of the pressures experienced by euro-area countries such as Spain.
Standard & Poor’s last week reaffirmed Britain’s top credit rating despite the economy contracting for a third straight quarter between April and June.
The institute had previously forecast no change in output this year. The institute, which has called for Osborne to loosen the fiscal stance by up to 2 percent of GDP to help create up to 200,000 jobs, said the economy would grow by 1.3 percent next year, below a previous 2 percent forecast.
Osborne’s 2010 austerity program, which was extended for two years to 2017 in November last year, envisaged that the economy would be growing by 2.8 percent this year. Instead, it is 0.9 percent smaller than in the third quarter of 2010, shortly after British Prime Minister David Cameron’s Conservative-led coalition took office.
A shortfall in tax revenue caused by the recession has led many economists to doubt that Osborne can meet his goal of cutting the deficit to ￡120 billion this fiscal year.
Cameron’s assertion that Europe’s debt turmoil is largely to blame for the economic malaise has been called into question by some economists and the opposition Labour Party, which argues the government is trying to cut the deficit too quickly.
Kirby said a slump in consumer spending, reflected in lower imports, would hurt the economy this year, while weaker exports to the US and the euro area will act as a drag next year.
The institute published research carried out with the London School of Economics and Political Science that estimates output would be ￡239 billion higher by 2021 if Osborne’s austerity plan had been delayed by three years.
“We would be seeing a small amount of growth rather contraction,” Kirby said.
The institute said the government needs to do more to fix the financial system and, while it welcomed initiatives like the Funding for Lending program that began this week, a piecemeal approach would not be enough to return credit conditions to normal.