Treasury must be more innovative, says Item Club

The Item Club wants the government to do more to boost the UK's housing market

The UK economy will see "sluggish growth" for the next two years unless the Treasury and Bank of England adopt a more innovative approach to boosting its expansion, a study has said.

The call comes in the latest report from the Ernst & Young Item Club.

It wants the government to spend more on infrastructure, and do more to support the housing market.

A Treasury spokeswoman said the government was continuing to take action to boost the UK economy.

Credibility 'risk'

The report predicts that the UK economy will grow by 0.9% this year, less than the government's own 1.2% forecast.

The most recent official figure showed that the UK economy exited recession in the third quarter of 2012, when it expanded by 0.9%.

The first estimate for the last three months of 2012 will be released on Friday.

Peter Spencer, chief economic adviser to the Item Club, said: "The UK has crawled out of recession, but the government's mid-term report card should read 'could do better'.

"A fresh approach to monetary and fiscal policy in the UK could help open the door to long-term sustainable growth."

He added: "There is scope for borrowing to help fund infrastructure investment, and the government could certainly do more to encourage housing investment, which is subtracting from GDP when it should be adding to it."

Regarding the Bank of England, the Item Club said the 2% inflation target had become "a risk to the credibility" of the Bank, and that the target was "long-past its sell-by date".

Mr Spencer said the US central bank, the Federal Reserve, was showing the kind of innovation required.

"It now actually has a target for unemployment - 6.5% unemployment with an inflation override - that's the sort of imagination that is actually putting a floor under the US economy and allowing it to continue to move forward," he told the BBC.

'Muddling through'

The UK's inflation rate - as measured by the Consumer Prices Index (CPI) - currently stands at 2.7%, and it has not been at or below 2% since 2009.

The current bank governor, Sir Mervyn King, will retire in June. The Item Club says that the change should be used by the Treasury to "review the remit" that it gives the Bank's interest rate-setting Monetary Policy Committee.

The Item Club report said that as the government continued with its "plan A" of cutting public spending to try to reduce the UK's public deficit, the economy was "muddling through".

Yet despite the Item Club's concerns, it did say that the UK economy should see at least short-term growth, "driven by improving prospects for the consumer, with falling inflation and rising employment levels boosting disposable income, helping to revive the High Street".

A Treasury spokeswoman said: "This report repeats the Office for Budget Responsibility's assessment, saying that the weak global environment has exerted 'a major drag on the UK economy'.

"Despite the difficult conditions, the economy is healing: the deficit has been cut by a quarter in two years and more people are in work than ever before."

"The government has taken action to support the economy, including through its innovative Funding for Lending Scheme, which the report notes has already provided a significant boost to the mortgage market".

The Office for Budget Responsibility (OBR) is the government's independent financial watchdog.

The Funding for Lending scheme was launched by the Bank of England and Treasury in August last year, with the aim of boosting lending to businesses and home buyers.