Chancellor George Osborne's economic strategy, intended to boost confidence and encourage investment, is having the opposite effect by deterring businesses and consumers from spending, a think tank has warned.
The sluggish recovery from recession will see the UK's long-term GDP growth rate drop to just 1.7% by 2015 - its lowest level since the Second World War and the equivalent of £165 billion in lost output over 15 years - said the Institute for Public Policy Research (IPPR).
The left-of-centre think tank called for a change in fiscal policy, featuring temporary tax cuts, additional infrastructure spending and further quantitative easing to boost demand and bolster anaemic investment from the private sector.
A two-year 2p cut in National Insurance would inject £14 billion into the economy and could be paid for by the introduction at a later date of a permanent mansion tax on homes worth over £2 million, said the report. And the Government could take advantage of historically low interest rates by borrowing £30 billion for investment in infrastructure at a cost of just £150 million a year.
The IPPR report was published days ahead of Wednesday's GDP figures, which will show whether the UK lifted itself out of double-dip recession in the second quarter of 2012. And it came after the International Monetary Fund downgraded its forecast for UK growth to just 0.2% in 2012 and 1.4% in 2013.
Using official statistics and Office for Budget Responsibility forecasts, the report calculated that by 2015 average growth over a 15-year period will have declined to 1.7%, compared to a historic average of 2.4% and a peak of almost 3.5% in the middle of the last decade.
The report called on Mr Osborne to ditch his plans to eliminate the national deficit within five years, and be prepared instead to increase borrowing in the short term and spread deficit reduction over a longer period.
Rather than creating a favourable environment for business investment, as the Chancellor claims, the IPPR said that the Government's austerity measures have made companies and individuals reluctant to spend because of uncertainty about the future.
The think tank's chief economist Tony Dolphin said: "The Government's measures to tackle the deficit were predicated on the assumption that they would lead to greater confidence and certainty about the future; in fact, they have had the opposite effect. The Government should implement temporary tax cuts and a boost to infrastructure spending not offset by cuts elsewhere. This would mean borrowing more in the short term.
"Fears that more quantitative easing would increase the risk of higher inflation in coming years are misplaced. Inflation pressures in the UK in recent years have been imported and are largely the result of high commodity prices. Domestic inflation pressures, for example wage growth, have been very low and this is likely to remain the case while there is a good deal of spare capacity in the economy. The time to worry about inflation is after the economy is restored to growth, not before."