UK think tank calls for easing austerity regime to spur demand

A leading UK research group says chancellor George Osborne should relax his tough austerity regime to spur slackening demand in the UK and not rely on the Bank of England to rescue the economy with more quantitative easing.

The National Institute of Economic and Social Research said today that fiscal policy in the UK was too tight and Osborne needed to consider temporary tax cuts for weaker sections to stimulate demand for goods and services, which collapsed due to stagnant wage growth, high inflation and high household debt.

"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," the group said in its quarterly economic review.

Osborne has long spurned calls for backing a plan to eliminate the structural budget deficit of the UK and the gap between revenues and spending, excluding the effect of short-term growth fluctuations - with £111 billion of spending cuts and tax increases by 2016, on fears that spook markets would push up borrowing costs and jeopardise recovery.

According to the research group, the chancellor would miss his target anyway as it forecast a structural budget deficit of around 1 per cent of gross domestic product in 2016.

Jonathan Portes, director of the national institute, told reporters the UK's fiscal credibility faced no threat from short-term measures to boost demand as long as longer-term plans to tackle the nation's finances were in place. The institute said the chancellor's targets could still be achieved if he readjusted fiscal policy when the economy was in better health, the institute said.