Investment News Spending Review Cuts Will Cause Subdued Economic Growth In 2011

Written by Editorial Team

Spending review: cuts will cause subdued economic growth in 2011

20 October 2010 / by Paul Dicken

Cuts to public spending will cause economic growth to be subdued throughout 2011, according to economists.

Publishing its latest economic review, the National Institute of Economic and Social Affairs said the government’s plans to drastically reduce public spending would slow growth to 0.5 percent for the third quarter of 2010, with ‘even more subdued’ growth in the last quarter and into 2011.

The Institute predicts household income will fall and consumer price inflation will remain ‘surprisingly high’

Some of the spending plans have been trailed in the media leading up to the chancellor’s official announcement later today (20 October). The plans for the Ministry of Defence were already outlined on 19 October.

The NIESR said despite the ‘fiscal brake on growth’ caused by reducing public spending, the UK economy would grow in 2010 and 2011 by 1.6 per cent each year. The institute believes trade will increase in 2011 contributing to overall economic growth.

“We suspect that spending cuts will be delayed and their scale reduced as compared to the budget plans. If the cuts were half the size and direct taxes were raised to fill the gap then output would be a ¼ percentage higher in 2011 and 2012, and the same budget target would be reached in 2015,” the NIESR said.

In its predictions for global growth, also published on 20 October, the NIESR predicted growth of 4.9 percent in 2010 and 4.5 percent in 2011.

Saying emerging markets had ‘escaped the worst of it’ in the recession, the institute predicted that China would continue to grow at a rapid rate, which would have a positive impact on the Japanese economy.

The depreciation in the value of the dollar and indications of further central bank support for the US economy led the NIESR to predict the North American economic recovery will be sustained.

The forecast put Euro area economic growth at 2.1 per cent in 2011, but this overall figure masked a ‘gulf between the strong and weak’. Output in Germany will expand by 3.4 per cent in 2010 and 2.8 per cent in 2011, while Greek gross domestic product (GDP) will shrink by 3.1 per cent in 2010 and 1 per cent in 2011.

Output in Spain and Ireland is expected to fall slightly this year.

The NIESR said: “The poor outlook for many developed economies reflects the lasting impact of the financial crisis. That attests to the need for more stringent capital requirements, as set out in the Basel III proposals in September.

“Our simulations suggest that the impact on GDP growth of raising capital ratios will be fairly limited, in line with the findings of the Bank for International Settlements.”

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