(From THE WALL STREET JOURNAL EUROPE)
By Ainsley Thomson
LONDON -- The U.K. government's austerity program received its most
scathing review yet when an influential nonpartisan economic think
tank Friday said the controversial measures have pitched the economy
into recession and cost the country 200,000 jobs.
In its latest quarterly economic review, the National Institute for
Economic and Social Research said its analysis indicated concerns that
the government's pursuit of sweeping spending cuts during a period of
economic difficulty would lead to significant losses in economic
output and protracted periods of high unemployment were "well
founded."
NIESR's findings are likely to intensify the debate within the U.K.
and other highly indebted countries in the West about spending cuts
versus stimulus amid increasing evidence that austerity is proving a
major drag on growth. The findings are also a further blow for
Chancellor of the Exchequer George Osborne, who has endured four
months of policy reversals, slumping poll ratings and political
stumbles, and is also facing increasing pressure to ease the pace of
the austerity. NIESR's report comes two weeks after the International
Monetary Fund told the government it should slow the pace of austerity
if the Bank of England's bond-buying stimulus program and the recent
measures to boost bank lending fail to revive the economy by the
beginning of next year. The BOE Thursday left its key interest rate at
a record low of 0.5% and the ceiling for its bond-buying program at
GBP 375 billion pounds (about $583 billion) at the conclusion of its
two-day monetary-policy meeting.
NIESR's report compared the consequences of the coalition government's
planned austerity measures -- which will see a further GBP 107 billion
of spending cuts and tax rises by 2015 -- with delaying the measures
until an economic recovery from the 2008 financial crisis is well
under way, which it estimates to be about 2014.
The London-based think tank, whose modelling work is used by several
central banks and finance ministries around the world, said if
austerity had been delayed, the U.K. would have avoided falling into
recession in the first quarter of 2012. Official figures last week
showed the U.K. economy shrunk 0.7% in the second quarter of 2012,
which means it has contracted for three consecutive quarters.
Recession is defined by some economists as at least two quarters of
economic contraction.
NIESR estimates that if the government had delayed the spending cuts,
the country's gross domestic product would have grown 0.7% during
2012. In contrast, the think tank, which also Friday released its
latest economic forecasts, expects the economy to contract 0.5% in
2012.
NIESR said the U.K.'s economic output, on a cumulative basis, would be
GBP 239 billion lower over the period from 2011 to 2021 than if it
would have been had austerity been delayed until 2014.
The government's early implementation of austerity also has serious
effects for the labor market. Dawn Holland, a senior research fellow
at NIESR and one of the authors of the report, said delaying austerity
until 2014 would have meant around 200,000 fewer people would have
lost their jobs and the unemployment rate would not have risen above
7.0%. The unemployment rate stood at 8.1% in the three months to the
end of May, the latest official figures show.
Ms. Holland said NIESR's model does not take into account the reaction
of international bond investors to a decision to slow the austerity
measures.
Mr. Osborne has long argued that the government's ambitious spending
cuts have won the country credibility with investors, which has led to
record low borrowing costs for the country.
However, Ms. Holland said delaying austerity would have only caused a
"moderate" reaction in the bond markets, adding around 0.40 percentage
points on to the U.K.'s borrowing costs.
Under this scenario, the U.K.'s benchmark 10-year government bond --
which was Thursday yielding 1.44% -- would yield 1.84%, which is lower
than for countries such as Australia, France and Austria.
However, NIESR said delaying spending cuts indefinitely was not an
option because rising government debt would eventually put upward
pressure on interest rates.
NIESR said its study was "necessarily narrow" and did not take into
account a number of factors that also may have impacted on the effects
of austerity, such as households' saving behavior, the bond investors
reacting more significantly than expected to rising government debt
and borrowing.
---
Jason Douglas contributed to this article.
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(END) Dow Jones Newswires
August 03, 2012 00:31 ET (04:31 GMT)
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