Government criticised as growth forecasts slashed
Jun 5 2008 by Peter McCusker, The Journal
AS policymakers sit down for a second day of deliberations on interest rates a leading economic watchdog has warned Britain is heading for a “significant downswing”.
The Organisation for Economic Cooperation and Development’s (OECD) gloomy outlook for the UK saw its predictions for GDP growth slashed from 2% to 1.8% this year and to 1.4% from 2.4% in 2009.
The OECD’s half-yearly economic outlook also said the Government was at risk of breaking its own “golden rule” of sustainable investment and criticised policymakers for “excessively loose” fiscal policy over the past 10 years.
It said the Bank of England should hold-off from further interest rate cuts to stimulate the economy as soaring inflation pressures persist, urging the Monetary Policy Committee to consider gradual reductions, possibly not until next year.
The report said: “Given the extent to which inflation is expected to exceed the target, the Bank of England should leave policy interest rates on hold in the short term, in order to ensure that high inflation expectations do not become embedded. However, some further easing in policy rates is likely to be required further ahead.”
Bank rate setters meet today for their second day of deliberations on the cost of borrowing and are widely expected to leave rates on hold at 5% as inflation rises further away from the 2% target.
The OECD added that the Government would be restricted in setting policy to boost the economy after failing to rein in public finances during the past 10 years of strong growth. It would now have to tighten fiscal policy at a time of slowing growth if it has any hope of ensuring that net debt should not exceed 40% of GDP, said the OECD.
“It is clear that much tighter fiscal policy will be required in the future if the rule is still to be respected,” said the report. “While ongoing economic weakness in 2009 would argue against fiscal restraint, the Government’s options have been limited by excessively loose fiscal policy in past years when economic growth was strong.”
But Prime Minister Gordon Brown’s spokesman disagreed with the OECD’s assessment, he said: “We don’t agree with that. The Government is committed to its fiscal rules and the Treasury will be providing an update of their forecast in the Pre-Budget Report.”
Shadow chief secretary to the Treasury Philip Hammond said: “This worrying report confirms what the Conservative Party has been saying all along – that Gordon Brown failed to fix the roof when the sun was shining.
“He borrowed in a boom, leaving us with the largest budget deficit of any industrial economy.
“Now we are all paying the price for his economic mismanagement, with Britain less well prepared than any of its neighbours to weather an economic slowdown.”
Liberal Democrat Treasury spokesman Vince Cable said: “This is truly awful news for the Government. It confirms all the worst fears about a deteriorating economy, and the lack of any freedom of manoeuvre due to lax control of Government spending on Gordon Brown’s watch.
“Instead of just drifting, ministers should plan ahead to mitigate the worst effects of the coming slowdown. The Government must ensure we do not get the spiralling repossessions we saw during the Tory recession of the early 1990s.”
