UK needs Obama-style fiscal stimulus plan, MPC member urges

The government should launch a £90 billion job drive aimed at saving 750,000 people from long term unemployment, a leading member of the Bank of England’s Monetary Policy Committee is urging.

Without more government intervention the unemployment rate will likely to rise to close to 10% by the 2009, according to David Blanchflower, professor at Dartmouth College and a specialist labour economist.

This in turn could have a catastrophic effect on the long term prospects for the unemployed and the outlook for the UK economy, he told an audience at the University of Stirling last night.

Blanchflower is urging Gordon Brown to consider a US-style stimulus package. ‘If we use the metric of the Obama package that would imply a fiscal stimulus in the UK of around £90 billion which would translate to creating 750,000 jobs,’ he said. ‘This number is a good starting point for discussion.’

Blanchflower says the government should consider a wide range of measures, including tax cuts for the low paid and young, financial incentives for young people to stay in education, and public spending projects on local authorities, universities and housing associations.

Otherwise the consequences could be dire, he warned.

‘Rising unemployment may lead to a reduction in the supply capacity of the economy,’ he said. ‘If workers remain unemployed for sustained periods they may lose their skills, thus reducing their human capital.

‘High rates of long-term unemployment in the economy may mean there is a mismatch between those skills that workers possess, and those for which there is demand. People may also be less likely to participate in the labour market the longer their spell of unemployment.’

Blanchflower said the unemployment also had ‘undeniably adverse effects’ on those experienced it.

‘A range of evidence indicates that unemployment tends to be associated with malnutrition, illness, mental stress, depression, increases in the suicide rate, poor physical health in later life and reductions in life expectancy, he said.