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National Institute for Economic and Social Research says UK performance has deteriorated since last autumn
George Osborne will miss his ambitious targets for slashing Britain's budget deficit as weak growth and a five-year squeeze on consumer spending hit tax revenues, an economic thinktank warns.
In a report that prompted fresh Labour attacks on the government's strategy, the National Institute for Economic and Social Research said the performance of the UK had "deteriorated markedly" since the autumn. It said the bounce back in output since the turn of the year after December's snow masked "the underlying weakness" of the economy.
NIESR said consumers faced a second successive year of falling real personal disposable incomes – the worst squeeze on spending power since 1972– and that house prices adjusted for inflation were likely to fall for the next five years as rising interest rates made borrowing more expensive.
The thinktank said economic output would grow by just 1.4% and that it would take until 2013 for activity to return to the peak of 2008.
In its quarterly review, NIESR concluded that the weak recovery would feed through to lower tax revenues. That meant that even if the spending plans are met over the next four years, public sector net borrowing will fall only to 3.6% of GDP in 2015-16, rather than the 1.5% projected.
Angela Eagle, Labour's shadow chief secretary to the Treasury, said: "NIESR is right to warn, as Labour has, that slower growth will mean lower tax revenues and so make it harder to get the deficit down.
"Cutting too deep and too fast, as this government is doing, is a vicious circle. George Osborne is already expected to borrow £46bn more than he was planning a few months ago because of the slower growth, higher unemployment and higher inflation his policies have delivered."
She added: "In contrast, a year ago, Labour's plans to support the recovery saw the economy start to grow strongly, unemployment fall and borrowing come in over £21bn lower than forecast. George Osborne needs to think again and finally realise that we need strong growth and more people in work, paying taxes rather than claiming benefits, to get the deficit down in a sustainable way."
A Treasury spokesman said: "Both the Office for Budget Responsibility's budget forecast and the independent average for 2011 is for growth of 1.7%. In the week that Portugal has confirmed it will receive a bailout of nearly €80bn, there can be no question of the need to deal with the deficit and rebalance the economy, both of which are vital preconditions delivering a new model of growth."
Today's NIESR report comes as the Bank of England announces its latest decision on interest rates. Threadneedle Street's monetary policy committee is expected to keep borrowing costs at their emergency level of 0.5% amid evidence that the economy continues to struggle.
With consumers hit by a combination of sluggish wage growth, rising inflation and higher taxes, the thinktank said last year's fall in real personal disposable income would be followed by a further decline in 2011. NIESR said the 0.8% drop in 2010 was the first since the deep slump of 1981 and the biggest per head of population since 1972.
"Real personal disposable incomes are expected to decline sharply, by 1.3% this year, in part due to the impact of tax increases that have come into effect in the first half of this year."
Real house prices will fall by 4.5% in 2011 and by an average of 1.5% per annum in the subsequent four years as borrowing costs rise, NIESR said.