NIESR cuts UK growth forecast and calls on Hammond to ease austerity

One of Britain's leading economic think tanks has reduced its forecast for economic growth and called on the chancellor to relax fiscal austerity where possible in next month's budget.

The National Institute of Economic and Social Research expects economic output to grow by 1.6% in 2017 and 1.7% in 2018. As recently as August NIESR expected growth of 1.7% this year and 1.9% next year.

NIESR said the main reason for cutting its forecasts was bleaker prospects for productivity. After disappointing figures for output per hour NIESR said it expected productivity gains of 1% on average over the next five years and not 1.2% as previously forecast.

The economy expanded by 0.4% in the third quarter, slightly faster than most economists expected but in line with NIESR's forecast. NIESR said the economy's slowdown was almost certainly due to last year's vote for Brexit, which has pushed up prices and suppressed business investment and productivity.

Without the Brexit vote, the average household might be more than £600 a year better off, NIESR said.

Garry Younge, NIESR's director of macroecomic modelling, said Philip Hammond, the chancellor should "make full use of the fiscal space available within the existing rules" to take account of weaker productivity. "There is scope at the margins to relax fiscal austerity a little while maintaining long-term fiscal discipline," he added.

Hammond is due to present his budget to parliament on 22 November. He must balance efforts to achieve self-imposed fiscal targets with pressures to increase public spending and support the weakening economy.

NIESR said: "Austerity fatigue has set in and the government is under pressure to raise spending across the board, in welfare, health, education, housing and salaries. Of these, perhaps the biggest risk to public finances is the cap on public sector wages.

"A material increase in public sector wages has the potential to spill over into the private sector and that would have consequences for both fiscal and monetary policy."

The Bank of England will increase interest rates for the first time since 2007 this month and then every six months to take Bank rate from 0.25% to 2% in mid-2021, NIESR predicted.