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Posen warns spending review will stifle growth

LONDON (SHARECAST) – Britain’s economy will take a “material” hit from the coalition government’s deficit-cutting plans over the next two years, Bank of England policymaker Adam Posen has warned.

The American, a member of the central bank’s Monetary Policy Committee (MPC), said in an interview with The Times that he thinks George Osborne’s package of tax increases and spending cuts will have a big impact.

These will impose a “material down-drag” on both growth and inflation and even Tuesday’s stronger than expected read on third quarter GDP should not generate too much excitement.

Posen, who’s recently come out in favour of more quantitative easing (QE) in the UK, warns that the economy remains weak, especially the construction sector.

“The underlying picture is still one of a weak recovery,” said the economist, who talked of “significant headwinds” following last week’s Comprehensive Spending Review.

“My forecast is the government’s plans for 2011 and 2012 will have a material down-drag on inflation and on growth,” Posen told the newspaper.

“The businesses I meet with in the property and construction sector don’t tell me we are having a historical boom in construction right now.”

Public sector job reductions, welfare cuts and the VAT increase will have a big impact on growth, while benefit cuts will also hurt the economy as the poor who receive them tend to spend most of their money.

“It is not for me to make any evaluation of the merits of the government’s priorities, but as a forecaster I expect the way the government has chosen to pursue consolidation having a bigger rather than a smaller impact.”

It was revealed last week that Posen voted in favour of more QE at the MPC’s October meeting. He wanted to increase the size of the asset purchase programme by £50bn to £250bn.

“Part of the reason I voted for an increase in QE is [that] to me the forecasting risks are on the downside, and I am not worried about inflation getting out of control by any means. To me the risks are much more that QE will not be enough than that we will overdo it,” he said.

 

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