“Despite the Government’s rhetoric on growth, we’ve learned today that the economy essentially did not grow at all during 2012. This is not really surprising. Having cut capital spending, the Government has instead placed its faith in the supposed confidence effect of deficit reduction to boost growth, using any money it has found to pursue supply-side measures like cutting corporation tax and freezing fuel duty. This strategy is a manifest failure.
“As we said a year ago, deficit and pursuit of growth are not as incompatible as the government’s current policy stance implies. The government should be taking the opportunity presented by deficit reduction to recycle savings made by axing low-growth measures, like the winter fuel allowance for better-off pensioners and the still huge pensions tax relief giveaway, and plough them into growth boosting infrastructure investment. Using taxes to fund investment should also be considered.
“While the Chancellor’s decision at the Autumn Statement to limit pensions tax relief for top earners is an example of a demand-friendly cut, we have not seen this approach pursued at anything like the scale needed to kick-start the economy.
“The Chancellor should use his March Budget to set out a serious plan to stimulate demand. He can achieve this and stick to his deficit reduction plan by front-loading the cuts or tax rises he will have to make by 2018 and switching that money into much-needed infrastructure projects. Doing so on the scale we have proposed could boost GDP by 0.7% in each year of the plan without adding a penny to the deficit.”