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Britain is not ready for its next recession and must consider changes to the way it manages its economy to see off the downturn when it comes, the Resolution Foundation, a think-tank, said on Monday.
British gross domestic product shrank in the second quarter of this year and the economy is struggling to pick up momentum as Brexit approaches, meaning it could already be in a technical recession before it leaves the European Union.
The Resolution Foundation said the Bank of England could muster only a quarter of the firepower needed in a typical recession because its key interest rate is so low and its bond-buying programme is likely to prove less effective now.
Therefore, the government should be more explicit about how it could pump money into the economy in a downturn and revisit its tax and benefit rules to cushion households against income shocks which have been weakened since the last slump.
The think-tank also called for a pipeline of shovel-ready infrastructure projects which could be sped up in a crisis and it said direct payments could be made to households if necessary.
“Now is the time to plan for the next recession – because the one thing we know for certain is that it will happen,” James Smith, Research Director at the Resolution Foundation, said.
“The UK today faces the highest recession risk since the financial crisis, and lower-income households are now more exposed to a downturn than they were back then.”
The Resolution Foundation urged Britain to go beyond tweaking its existing toolkit and to consider the case for raising the BoE’s inflation target above its current level of 2.0 per cent although it conceded such a move would be challenging to carry out.
Britain’s new finance minister Sajid Javid last week announced the biggest increase in day-to-day spending in 15 years, a move widely seen as part of Prime Minister Boris Johnson’s push for an early election.
Javid has also said he will review the country’s fiscal rules which Johnson has suggested could be relaxed to take advantage of record-low borrowing costs.