IFS urges govenment not to soften stance on austerity cuts - Telegraph.co.uk

The IFS plea came as data show that the economy was rebounding for a shock contraction in growth in the final months of last year, mostly due to severe winter weather.

Data published last week showed the economy shrank by 0.5pc in the last three months of 2010. However, data yesterday showed British factories enjoyed a record-breaking start to 2011, while contruction - hard hit by the snow - appears to have bounced.

Rising sales at home and abroad helped manufacturing activity to expand in January at the fastest pace in the 19 years, according the the Markit/CIPS PMI manufacturing survey on Monday.

Both the flow of new orders and the number of jobs grew at record-breaking rates, while production rose at the fastest pace since the mid-1990s, confirming the sector as the recovery's success story.

Today the PMI construction survey showed activity returned to growth in January, helped by better weather and a rise in new business. The Markit/CIPS PMI construction activity index rose to 53.7 in January from December's reading of 49.1, which had been the first fall in 10 months, due to heavy snowfall.

Markit said construction companies' expectations for the coming year rose to an eight-month high. However, employment continued to fall and Markit said the outlook for further growth in the sector was muted.

Jeremy Cook, chief economist at foreign exchange brokers World First, said it was encouraging news for the construction sector. "This obviously follows the good manufacturing figures we saw yesterday, but all eyes are on tomorrow's service sector release," he said.

Ross Walker, economist at RBS, said: "Some of this was just a sort of base effect distortion in all probability - but it does suggest that the snow was a blip and we have got back to levels of activity above the pre-weather disrupted period."

While the pound rose, gilt and short sterling futures fell as investors bet on the prospect that a return to growth increased the likelihood of a rate hike from the Bank of England.

In a sign the central bank is inching closer to tightening policy, Deputy Governor Charles Bean said it may be forced to raise rates if commodity prices continue to climb and inflation becomes embedded, while long-standing board member Andrew Sentance said the bank risked losing its inflation-fighting credibility if it did not act soon.

Inflation is running at 3.7pc, almost double the target.

In a report produced with Barclays Capital and Barclays Wealth, the IFS said any gains from additional improvements in public finances should be banked.

It identified two main risks to government deficit reduction plans - slower growth and the difficulty in carrying out spending cuts.

Under Barclays' worst-case "pessimistic scenario", public sector net debt would still be rising in 2015-2016.

The Conservative-led coalition has been criticised for a failure to come up with a "Plan B", should the economy run into trouble in coming months.

The IFS endorsed this call, saying that having alternative plans to hand could be useful.

It urged the government to review its spending settlements in a couple of years' time.

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