Chancellor under increasing pressure to abandon Plan A as the country teeters on the brink again
George Osborne is facing pressure to sacrifice inflation targets to kickstart growth, with official figures this week expected to show Britain sliding towards an unprecedented triple-dip recession.
The Ernst and Young Item Club forecasting group joins those calling on the government to abandon the 2% inflation target, forcing the Bank of England to take more drastic action to lift the economy out of its slump. “The target has passed its sell-by date,” said Item’s Peter Spencer, who forecasts growth of 0.9% in 2013. “The government could probably muddle through to the election with Plan A, but could do much better.”
The Office for National Statistics will publish its first estimate of GDP growth for the final quarter of 2012 on Friday and many experts, including at the Bank, expect it to show that the economy contracted. A second negative quarter, from January to March, would mark the onset of Britain’s third recession in five years.
Many of the coalition’s critics would like to see the chancellor reverse some spending cuts. “We think the case for immediate stimulus is now extremely strong. We have had more than two years with nonexistent growth, where the economy has failed to bounce back,” said Nicola Smith, chief economist at the TUC. Compass, the leftwing thinktank, today publishes its “Plan B+1”, calling for policies, including green investment, to rebuild the economy.
Adam Posen, director of the Peterson Institute for International Economics and until last year a member of the Bank’s monetary policy committee, said Osborne “boxed himself into position” by pinning his reputation on austerity. “It’s inexcusable for the chancellor not to take reality into account when making fiscal policy. When you’ve implemented everything, and it’s had the opposite effect, and it’s been a bad effect, you have an ethical and public responsibility to change policy.”
Osborne is known to be interested in the idea of a so-called “nominal GDP” target, which would point to a more aggressive policy approach in times when growth is very weak, even if that means higher inflation. Business secretary Vince Cable has backed the idea, arguing that the Bank is the only quango that doesn’t have boosting growth as one of its objectives.
“The debate will intensify over the next few months,” said a Treasury spokesman. “There’s a reasonable possibility that monetary policy is going to become more of a focus than fiscal policy.” Another senior Whitehall insider said: “It’s definitely the way the mood music is going.”
Mark Carney, the Canadian who will take over as Bank governor in the summer, has signalled that he might consider a nominal GDP target. In a speech late last year, he also pointed to other approaches rejected by current Bank governor Sir Mervyn King, such as the so-called “forward guidance” adopted by the US Federal Reserve.
The Fed has promised that it will continue with the recession-busting policy of quantitative easing – buying assets with electronically created money – until unemployment has fallen to 6.5%. Spencer says it is as much the Fed’s determination, as its target, that makes the difference. “I think it’s a question of pushing it, and driving it, more than the actual mechanism: the Fed are just so hot to trot,” he says.
Not all economists back ditching the inflation target. Erik Britton, of Fathom Consulting, says the Bank could be doing more to stimulate the economy – such as using the money electronically created in quantitative easing to buy up bad loans from struggling banks – within the current regime: “Is there more they could be doing? Yes. Should they be doing it? Yes. Has that got anything to do with the target? No.”