U.K. finance minister George Osborne, facing a double whammy of higher borrowing and lower growth, should announce an extra 10 billion pounds ($15 billion) of capital spending when he unveils his budget on Wednesday, according to an influential group of economists.
The money should be spent on "shovel-ready" infrastructure projects over the next two years and would boost gross domestic product (GDP) by 0.5 percentage points in each of the years, the Ernst & Young Independent Treasury Economic Model (ITEM) club, an independent forecasting body, said on Monday.
Based on the ITEM club's modelling, the independent fiscal watchdog, the Office for Budget Responsibility (OBR) is set to announce net government borrowing has exceeded forecasts by 8 billion pounds ($12 billion) for 2012-2013. The OBR is also expected to cut its economic forecasts for 2013 from 1.2 percent to just under 1 percent.
"The economy needs a kick start to really get the recovery moving. The markets have also shown they are open to a more measured pace of austerity than they were even 12 months ago...Now is the ideal opportunity for the Chancellor to make a bold move," Andrew Goodwin, senior economic adviser to the ITEM Club said.
According to the ITEM Club of all the tools at the Chancellor's disposal, capital spending would have the highest impact via the fiscal multiplier, whereby 1 billion pounds of government spending would boost GDP by 1 billion pounds as well.
"New investment could go towards numerous transport projects, in particular the roads, and also to fund essential repair and maintenance work on our hospitals, schools and other public buildings," the organization said in a report.
It added the government should announce measures to boost the housing market, especially first-time buyers.
So far, George Osborne has defended his austerity plan and said last month after Moody's downgraded the U.K.'s AAA credit rating that the country must stay the course and reduce public sector borrowing.
But according to the ITEM club, Moody's downgrade should actually free the U.K. government of its political shackles. It points out that U.K. borrowing rates haveactually fallen 10 basis points since Moody's announcement.
"It appears virtually inevitable that the other agencies will follow, probably after the Budget, so the need to shape policy to try and protect the credit rating is no longer present."