Press Story

The UK economy is set to lose £165bn of GDP output by 2015, according to new analysis by the think tank IPPR. Using official statistics and forecasts from the Office for Budgetary Responsibility, IPPR calculates that stalling economic growth will lead to a cumulative loss of output of 11 per cent.

The report is published ahead of official figures showing whether or not the UK economy returned to growth in Quarter 2 of 2012, due to be published on Wednesday (25th). Last week, the International Monetary Fund (IMF) said that tax rises and spending cuts since 2010 have wiped 2.5% off the UK's GDP, which IPPR analysis shows amounts to £38bn.

IPPR's new report argues that more effort is required to boost demand in the short-term and to ensure that the economy's growth potential is supported in the medium-term. It says that a path back to growth will require a change in fiscal policy, but on its own this will not be sufficient.

IPPR also argues for reforms to address long-standing weaknesses in the UK economy: underinvestment, vulnerability to external shocks, a poor export performance and persistent inequalities. The report argues that the path back to growth should also be a path to a different kind of British capitalism.

Last week, the IMF downgraded their forecast for UK economic growth, to just 0.2 per cent in 2012, down from the 0.8 per cent it was expecting in April. The 0.6 per cent downgrade is the largest experienced by any advanced economy in the IMF's regular World Economic Outlook.

IPPR's new report recommends a roadmap for growth with six elements:

An increase in the scale of quantitative easing
Fiscal measures to boost growth in the short-term combined with a reaffirmation of the plan to eliminate the deficit in the medium-term
Additional infrastructure spending
Measures to make household debt restructuring easier
Measures to keep the long-term unemployed in touch with the labour market
An active industrial policy

Tony Dolphin, IPPR Chief Economist, said:

"The Government's measures to tackle the deficit were predicated on the assumption that they would lead to greater confidence and certainty about the future; in fact, they have had the opposite effect.

"The Government should implement temporary tax cuts and a boost to infrastructure spending not offset by cuts elsewhere. This would mean borrowing more in the short-term.

"Fears that more quantitative easing would increase the risk of higher inflation in coming years are misplaced. Inflation pressures in the UK in recent years have been imported and are largely the result of high commodity prices. Domestic inflation pressures, for example wage growth, have been very low and this is likely to remain the case while there is a good deal of spare capacity in the economy. The time to worry about inflation is after the economy is restored to growth, not before."

The report shows that the human cost of the failed recovery has been most heavily felt through its effect on unemployment. Overall, there are more than 1 million additional people unemployed now than there were before the recession began. The report highlights some groups that have fared particularly badly:

885,000 people in the UK had been out of work for more than a year, more than a third of all jobseekers. Many of them are aged over 50 and face the prospect of never securing a permanent, full-time job again.
At the other end of the age spectrum, unemployment among young people stands at 1,024,000 - close to its highest level since comparable records began in 1992. Studies show that long periods of unemployment (or moving frequently from one temporary post to another) while people are young has a 'scarring effect' that lasts throughout their working lives.

The report argues there is an understandable reluctance on the part of companies in the UK to spend money on increasing their productive capacity. The report says Government ministers have called the business environment favourable and accused companies of whingeing about government policy when they should be investing their cash piles but, from a business perspective, the outlook is decidedly uncertain and this is a major deterrent to making long-term plans and spending money. The report argues that policy needs to be oriented towards reducing uncertainty.

Notes to Editors

IPPR's new report - A path back to growth - is available in advance from the IPPR press office and will be published at: http://bit.ly/IPPR9438

Over the very long-run, the UK's average growth rate has been 2.4 per cent. Over the 15 years to 2015, if the OBR's forecasts prove accurate, average growth will be 1.7 per cent. The difference between 2.4 per cent and 1.7 per cent cumulated over 15 years is 11 per cent of GDP. In current terms, this is equivalent to £165 billion.

Contact

Richard Darlington, 07525 481 602, r.darlington@ippr.org