Commenting on the decision, The National Institute of Economic and Social Research said: “It remains our view that the government could have addressed the weakness in demand this year with a temporary, targeted, timely fiscal loosening (i.e. slowing the pace of fiscal consolidation).
“However, the government remains wedded to ‘Plan A'.
“The OBR has left its forecast for UK economic growth broadly unchanged for the period 2012 to 2016.”
However this is not the case for 2012 itself. Business investment growth has been revised down sharply (by 6.9%) due to the sharp fall in the final quarter of last year, but also due to a weakening of the near term outlook for business investment.
The OBR highlighted the heightened uncertainty from the continuing euro area crisis as a major cause. Other components have been revised upwards to offset this.
The NIESR said: “Although the OBR's view is now closer to ours, we still believe their outlook for business investment and the accumulation of inventories is too optimistic in the near term.
“Continued uncertainty combined with funding problems in the banking sector are likely to result in a sharp fall in business investment and a negative contribution from inventory accumulation this year, keeping the economy broadly flat.
“But as both the investment and inventory cycles turn we expect a stronger rate of GDP growth in 2013 (2.3% compared to the OBR's 2%).”
The NIESR said the government clearly views the issue of business investment with concern. The additional reduction in corporation tax and implementation of the National Loan Guarantee Scheme are designed to boost business investment. However, they do not address the major factor depressing business investment this year: a lack of demand.
It believes the impaired credit supply from the banking system remains an important constraint on economic activity.
“The clearest evidence is the persistently high cost of funding for most UK banks, which in turn is a reflection of perceived credit worthiness,” it said.
“The NLGS, announced in the Autumn Statement and spelt out in the Budget, is a welcome offset to the negative consequences that the current malfunctioning of the banking system imposes on the real economy.
“However, because of the difficulty of determining credit worthy borrowers the support is indirect by lowering the cost of bank funding.
“It has taken a year for the government to recognise impaired credit as a constraint on activity. While we welcome this scheme, it is a poor second best to the necessary reform of the banking system including separation of retail and wholesale banks.”
