Osborne should lay out euro crisis stimulus plans - IFS

Chancellor George Osborne should publish broad stimulus plans for an emergency such as a break-up of the euro zone in next month's budget, the country's leading fiscal policy think-tank said on Wednesday.

The Institute for Fiscal Studies said that while austerity is needed in the coming years to fix public finances, the case for some short-term stimulus had strengthened as the economy has probably entered a mild recession.

But it acknowledged the large risks to even a temporary spending boost, saying any loss in market trust could cost Britain dearly as it has to issue 740 billion pounds to fund new borrowing and refinance maturing bonds over the next five years.

Britain's Chancellor of the Exchequer
George Osborne arrives at the
Treasury in London January 25, 2012.
REUTERS/Suzanne Plunkett

"Regardless of whether or not Mr. Osborne thinks that a substantial short-term fiscal stimulus is appropriate at the moment, he should set out now broadly what he would do under alternative scenarios where the economic outlook for the UK is sharply weaker - such as were the Eurozone to collapse" it said.

IFS programme director Gemma Tetlow said clarity now could avoid accusations of any U-turn later.

"It might be reassuring for businesses and individuals that, if something were to go wrong, the government would be prepared and in a position to do something in the short-term," she said.

The debate about the need for a short-term boost is already heating up ahead of the budget, due on March 21, as the economy contracted by 0.2 percent at the end of 2011.

Chancellor Osborne has blamed the euro zone debt crisis for Britain's meagre economic performance over the past few months. The government has said it is working on plans for all eventualities but has so far refused to give any details.

Osborne announced more spending cuts in November to meet his main target to erase the budget deficit within five years as the weak economic outlook drives up borrowing.

A Treasury spokesman said the IFS's report supported the government's deficit policy. "The IFS say that ... any fiscal stimulus big enough to make a difference would undermine investor confidence and so risk higher interest rates," he said.

Consultancy Oxford Economics, which provided the IFS with alternative growth scenarios, said if the euro zone breaks up, Britain's economy would slump by 1.7 percent this year and 0.9 percent in 2012. Its central view is for 0.3 percent growth this year and 1.9 percent next, lower than the government fiscal watchdog Office for Budget Responsibility's forecast of 0.7 percent growth in 2011 and 2.1 percent in 2013.

The IFS said under its main scenario - using the OBR's growth forecasts - the government's net borrowing was likely to be nearly 3 billion pounds lower in 2011/2012, and some 9 billion pounds lower in 2016/2017 than the OBR itself predicts.

©Reuters 2012

Eurosceptic anger at Cameron U-turn

David Cameron is facing a backlash from Tory eurosceptics after abandoning his opposition to the European Court of Justice being used to enforce a new fiscal compact for the eurozone.

The Prime Minister has previously insisted that European Union institutions could not be used for a new pact because Britain will not be a signatory.

After his dramatic use of the veto last month to block a new treaty, he said the European Commission and the European Court of Justice could only carry out policies applying to all 27 member states.

David Cameron said the UK would only
make any challenge to a new EU treaty
 if the country's interests were 'threatened'

However after a further EU summit in Brussels, Mr Cameron did not press his case against the use of the institutions and said Britain would only make any challenge if its interests were "threatened".

The Prime Minister said: "We don't want to hold up the eurozone doing what is necessary to solve the crisis as long as it doesn't damage our national interests, so it's good that the new treaty states clearly that it cannot encroach upon the competences of the Union and that they must not take measures that undermine the EU single market."

He added: "The key point here for me is what is in our national interest, which is for them to get on and sort out the mess that is the euro. That's in our national interest. We will be watching like a hawk and if there is any sign that they are going to encroach on the single market we will take the appropriate action, if I may put it that way.

"The principle that the EU institutions can only be used with the permission of 27 (member states) has not changed. In as much as this (new treaty) is about fiscal union, fine: if it encroaches on the single market, not fine."

Tory MPs who were jubilant after Mr Cameron wielded the veto voiced their fears ahead of the summit that the Prime Minister would allow EU institutions to be used to police the new pact. The matter is likely to be discussed at the 1922 Committee of Tory backbenchers on Tuesday. Mr Cameron will report back to the Commons on the latest summit.

Leader of Britain's Tory MEPs Martin Callanan said government policy on the fiscal compact had changed, partly because of a need to mollify Nick Clegg, the pro-Europe Deputy Prime Minister.

Mr Callanan said: "There is no doubt that the Government's position has altered since the December summit when they were insisting the institutions could not be used I blame a combination of appeasing Nick Clegg, who is desperate to sign anything the EU puts in front of him, and the practical reality that this pact is actually quite hard to prevent: the Government would have to ask the European Court of Justice to rule against itself having a role."

Chancellor 'confident' on economy

Chancellor George Osborne has insisted the Government was doing everything possible to "weather the storm" as economic forecasters warned the UK is likely to be already in recession.

The Ernst & Young ITEM Club and the Centre for Economics and Business Research both believe that gross domestic product (GDP) shrank in the final quarter of last year and will fall again in the first three months of 2012. A recession is defined as two consecutive quarters of contracting output.

Mr Osborne said the most recent predictions by the Office for Budget Responsibility, which issues official forecasts, showed that Britain would have a negative quarter of growth but not go into recession.

He told BBC Radio 4's Today programme: "That's their forecast, but they were the first to say that it is very uncertain and one of the biggest risks to the British economy is the further deterioration of the eurozone crisis.

The Government is doing everything it can to deal with the economic crisis, Chancellor George Osborne has said

"I said openly at the end of November to the House of Commons when I made my autumn statement that if the eurozone were to go into a deep recession, that would have a real impact on the British economy.

"I'm confident the British Government is doing everything it can with a very difficult inheritance, facing a very difficult international situation to get Britain through this, to weather the storm."

The warnings come shortly after France, the second biggest economy in the eurozone, saw its AAA credit rating downgraded by Standard & Poor's in a move which signals more troubles for the single currency bloc.

Professor Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club, said: "Figures for the last quarter of 2011 and the first quarter of this year are likely to show that we are back in recession and we are going to have to wait until this summer before there are any signs of improvement. But it's not going to be a repeat of 2009 - we are not going to see a serious double dip."

The ITEM Club report forecasts GDP growth of just 0.2% this year before increasing to 1.8% in 2013 and 2.8% in 2014. It said deteriorating levels of confidence will see business investment stagnate in 2012, while export prospects have already slowed.

But the group said UK companies have stronger balance sheets than in 2009 and have built up large cash stockpiles, which will provide a useful insurance policy if the situation deteriorates further.

©Press Association