Almost half of experts who backed chancellor in opposition now say Treasury should borrow to spend on infrastructure projects
Pressure on George Osborne for a softening of the government's hardline economic strategy intensified on Wednesday after leading economists who backed the chancellor's plans in opposition called for immediate action to lift Britain out of double-dip recession.
In a blow to the chancellor, almost half the economists who strongly supported the Conservative party's deficit-reduction proposals in the runup to the 2010 election said it was time for a rethink and urged the Treasury to take advantage of low borrowing costs to boost spending on infrastructure projects.
Labour seized on a report in this week's New Statesman magazine detailing the change of heart of nine of the 20 experts who signed a letter in February 2010 supporting austerity, with only one sticking to an endorsement hailed by Osborne at the time as a "really significant moment in the economic debate".
Rachel Reeves, shadow chief secretary to the Treasury, said: "With a double dip recession made in Downing Street and the economy shrinking, not growing, since the spending review, it's no surprise that even economists who once backed George Osborne are now calling for action to get the economy moving.
"Unlike George Osborne and David Cameron, they can see that the evidence now points to the need for a change of course. They know that without growth we can't get the deficit down – George Osborne is already forecast to borrow £150bn more than planned."
Although the economists said they had been right two and a half years ago to urge immediate spending cuts as a way of tackling Britain's record peacetime deficit in the course of one parliament, they said the changed economic circumstances justified growth-creating measures.
Roger Bootle, managing director of Capital Economics, said: "If I were chancellor at this point, I would alter the plan, I would stop the cuts to public investment and I might even seek to increase it. Supply-side reform might be welcome but what we're talking about here is a shortage of demand. The key thing is to try and get the private sector to spend its money and that may require a bit of government spending to prime the pump."
Tim Besley, economics professor at the London School of Economics and a former member of the Bank of England's monetary policy committee, said: "I would prefer to see government resources used in a targeted way and there may be creative ways of using the government balance sheet. I am particularly keen to have more focus on housing in the near term."
The chancellor's handling of the economy has come under scrutiny as the economy's tentative recovery in 2010 has stalled. Output is now lower than it was when the coalition was formed two years ago while the Bank of England believes it will take until 2014 for gross domestic product to return to the peak reached in early 2008. Threadneedle Street expects the economy to contract by 0.2% this year.
Ministers were taking some comfort from news that the economy is managing to create thousands of new jobs despite the weakness of growth. Employment rose by more than 200,000 in the three months to June, the biggest quarterly jump since 1989.
Even so, economists are concerned that unemployment may start to rise again against a backdrop of the sovereign debt crisis in the eurozone, a slowdown in the global economy and weak domestic demand.
Osborne has already been forced to abandon plans to eradicate the structural part of the UK's current budget deficit – the part that will remain even when the economy returns to full health – during the course of this parliament. Austerity measures will now continue for the first half of the next parliament as a result of the impact of slower growth on the public finances.
The chancellor has always maintained that his deficit-reduction plan is necessary to keep the support of the financial markets and the credit ratings agencies. He has insisted that a U-turn would only lead to higher interest rates and slower growth.
Hashem Pesaran, economics professor at Cambridge University, said in the New Statesman: "My views have not changed – but this does not mean that I have agreed with this government's obsession with credit ratings and fiscal reductions at the expense of growth-inducing policies.
"I was in favour of taking account of the possible adverse effects of large and unsustainable government deficits on borrowing costs and financial stability.
"I believe this government's policies have not followed the balance I had in mind when I signed the letter."
The original letter, published in the Sunday Times, said: "In order to be credible, the government's goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-2011 fiscal year."
Of the signatories, Albert Marcet of the Barcelona Graduate School of Economics said there was "no urgency" to alter the path of deficit reduction.
Nine of the 20 were either on holiday or declined to comment.