ceedee's posterous

Spanish unemployment broke through the 5-million barrier on Friday as the new government of Mariano Rajoy began to quietly beg the European Union to ease up on deficit targets that are sending the country hurtling back into recession.

Spain, which already boasted Europe's worst unemployment rate, recorded 350,000 people losing their jobs in the last quarter of 2011.

That rate now stands at 22.8% of the population and is set to worsen as Rajoy's conservative People's party government pursues a €40bn (£33bn) budget adjustment, most of it in spending cuts, to meet the EU's deficit target of 4.4% this year.

With a record 5.3 million unemployed, Spain faces a spiral of decline. The IMF has already predicted that the economy will shrink by 1.7% this year, with a further decline in 2013.

While Rajoy, who met German chancellor Angel Merkel in Berlin on Thursday, publicly maintains his target of reducing the deficit to 4.4% from more than 8% last year, his ministers are letting it be known that they want the EU to ease up on deficit targets which require severe adjustments.

Rajoy himself has pointed out that the EU's target for 2011 supposed not only that last year's deficit would be 6%, but also that growth this year would reach 2.3%.

"We need growth predictions from Brussels and that is when we will start negotiating with them on Spain's stability programme," the finance minister, Luis de Guindos said.

Almost 1.5m Spanish households now have no wage earner, with 3.5 million people joining the dole queue over the past four-and-a-half years. Southern Andalucia has a 31% unemployment rate, while 35% of immigrants and 39% of under-25s are jobless.

"Harsh adjustment policies not only fail to solve the problem, they can make it worse," warned Cándido Méndez of the General Workers' Union.

Further evidence that public austerity programmes were damaging the wider economy came from figures on company closures.

Around 35,000 companies folded in the second half of the year – a third of all those to have shut since Spain's economy ran into trouble at the end of 2008.

Much of the spending cuts have to come from regional governments, who provide basic services such as health, education and social services.

Spain's pharmaceutical companies said regional governments were now taking 525 days to pay bills for medicines provided to hospitals, with €6.3bn outstanding.

Meanwhile, the chairman of the Caixa savings bank, Isidre Fainé, predicted further gloom in the housing market, in which up to 700,000 new-build homes remain unsold after a housing bubble burst several years ago.

He predicted that house prices, which have dropped around 30% since their peak, could fall to 50% or 60% of their top value before recovering.

This stunning time-lapse video of the northern lights was filmed over Birtavarre in Troms, north Norway. The northern lights, or aurora borealis, are caused by electrically charged solar particles reaching Earth. The phenomenon was stronger than usual this week - even visible in the British Isles - due to a large ejection of solar particles on Sunday

Source: Youtube/Per Ørjan Bertelsen

The threat posed to the British economy from the eurozone crisis was underlined on Wednesday when Portugal saw its borrowing costs soar to a record high amid market fears that the bailed-out country will not be able to break free of its financial crisis in the near future.

The yield, or interest rate, on three-year bonds reached 19.4%, while the rate on 10-year bonds was 14.6%, figures that compare with British rates of less than 2%.

Portugal needed a €78bn (£65bn) rescue package last year as its high debt load and feeble growth pushed it towards bankruptcy.

A three-year programme of austerity measures and economic reforms is aimed at restoring investor confidence in the country, but a deepening recession, with a 3.1% contraction forecast for this year, is undermining the faith of the markets in Portugal.

The worsening crisis in the eurozone has hit the British economy, and analysts fear that the contagion from Greece may spread throughout the eurozone and drag Britain and the rest of the world into a prolonged recession.

Antonio Barroso, an analyst with Eurasia group, said in a note that the recent downgrade and Greece's troubles "are increasing the perception that Portugal might not be able to avoid a default".

However, given Portugal's commitment to restoring fiscal health, he said: "It is likely that the government might have an easier time negotiating a new rescue package than Greece."

Portugal's government has repeatedly rejected speculation it that might try to renegotiate its bailout deal.

Arduous, long and uneven. That was how Sir Mervyn King described the UK's recovery from the deepest recession since the second world war, and he wasn't exaggerating. The 0.2% contraction of the economy in the final three months of 2011 was a dismal performance, even allowing for the crisis in the eurozone and makes a second recession in three years a real threat.

Here's how things stand. Activity in 2011 grew at 0.9%, less than half its rate of expansion in 2010. After slumping by more than 7% in the 2008 and 2009, the UK has managed to recoup only half the lost output and is now going backwards once more. Growth in the fourth quarter of 2011 may well have been boosted by a late surge in consumer spending in the week before Christmas, leaving the risk that the high streets will be empty in the first three months of 2012 when the credit card bills have to be paid off.

Politically, Ed Balls has been vindicated. The shadow chancellor has been warning for the past year that the economy could not withstand the government's shock treatment and has been urging George Osborne to heed the advice of the International Monetary Fund and ease up on the pace of austerity. Attacking the government for Labour in the current circumstances should be like shooting fish in a barrel.

That is not what the opinion polls suggest, however. On the contrary, the chancellor is getting an easy ride considering that he inherited an economy that was growing at more than 1% a quarter in the spring of 2010 and has been losing momentum ever since. Voters still seem to find Osborne's simple narrative – Britain was on its uppers in 2010 and would be like Greece without severe budgetary restraint – more convincing than Labour's more nuanced message.

What Balls and Ed Miliband are saying is twofold: while there should be a slower pace of deficit reduction in order to boost growth, Labour can make no promises about what it will do after the next election. Over the last couple of weeks, the second part of that message has tended to drown out the first: Wednesday's GDP figures give the opposition the chance to redress the balance.

Potentially even more dangerous for Osborne could be the reaction of the financial markets and the credit rating agencies. For the past 18 years, the chancellor has been something of a pin-up boy, with praise for the way he has tackled the legacy of the last slump. But the assumption has always been that deficit reduction will be accompanied by robust growth. Austerity without growth will result in a higher deficit, and it may not be too long before the credit rating agencies start to reflect that. There have already been some murmurings of disquiet and these will grow if the economy does contract again in the first quarter of 2012, thus fulfilling the official definition of a double dip recession.

The chances of that look reasonably high. It is not just that the eurozone remains fragile, it is that there is no immediate respite in prospect for the economy's domestic problems. It is true, as King noted in his speech on Tuesday night, that inflation is coming down but there will still be a gap this year between wage increases and price increases. The squeeze on real incomes was the real reason for the slowdown in activity last year, and that has now been overlain by weaker exports and government retrenchment.

King would have known what the GDP figures were before making Tuesday night's speech, and he was clearly softening up the public for another dose of quantitative easing from the Bank next month. The amount of money creation by Threadneedle Street since 2009 already stands at £275bn: expect a further £75bn to be sanctioned by the Bank's monetary policy committee in a fortnight's time. With the economy in its current enfeebled state, there are some in the City who think the total could hit £500bn before the Bank is done.

Is the government purposefully hiding this figure from us?

How big is the UK national debt? My guess is that you don’t know. Most people are unaware.

Bloggers don’t know: this chap thinks we bailed out the banks by “borrowing from the banks”.

Celebrities haven’t a clue – here’s the team of Have I Got News For You, featuring rock musician Noddy Holder, getting into an awful tangle:

Noddy Holder: But who do we owe this money to?

Alexander Armstrong: Well, the future, I suppose, don’t we? Our children.

Noddy Holder: We owe it to the future?

Paul Merton: We don’t have to pay it back then do we?

Noddy Holder: No!

Paul Merton: Let the future come to us!

But worse of all, politicians don’t know. Just watch this footage of MPs trying to guess the size of the National Debt (from about 7:30 minutes in). At the time, Alan Johnson was shadow chancellor. For politicians not to know the size of the National Debt is unforgivable. They deserve whipping with their own entrails. But I’ll offer an excuse for HIGNFY regulars, bloggers and bemused citizens.

The reason nobody knows how big the National Debt is because it is so hard to find out.

Under Labour the figures were a mess. Projections of National Debt growth were concealed to avoid alarming the public. In December 2009, Alistair Darling was asked by the Treasury Select Committee why the interest payment forecasts were never published. He couldn’t answer. Both Michael Fallon MP (Conservative, Sevenoaks) and John McFall MP (Labour, West Dunbartonshire) excoriated Darling for his inability to answer.

What is the answer?

It would be nice to be able to tell confused individuals such as MPs, bloggers and HIGNFY regulars what the National Debt comes to. But where to look?

The Treasury, Bank of England, the Office of National Statistics (ONS) and the Debt Management Office all fail to present the total National Debt in a simple format. Instead we have to trawl through the websites of these institutions to come up with a total figure.

The Debt Management Office sorts out government borrowing. When the government wants to borrow a few billion quid, the chancellor rings up the DMO and asks them to issue bonds (known as gilts, because they used to be beautiful paper certificates with a shiny gold-leaf border) that are bought by pension and insurance funds plus foreign countries. Explore the DMO website and you’ll eventually discover the figure for Gilts in Issue, which today stands at £1,102.17bn.

These gilts are, in laymen’s terms, the IOUs the government has issued. One day the government will have to buy back all of these IOUs.

We also borrow money through the National Savings & Investment scheme. Set up by Lord Palmerston in 1861, NS&I is a cheap way for the government to borrow. £103bn is lodged at NS&I, so we can add that to the gilt debt.

But the government owns assets too, such as gold, foreign currency reserves and bonds, so we should subtract that from the amount owing. After all, if we have assets as valuable as our debts then we wouldn’t think of ourselves as being in debt at all. On the asset side we will only count liquid assets, such as foreign cash and gold, rather than illiquid ones. Illiquid assets include things such as the British Library or the M1 motorway, and we are not ever going to sell assets like those, so they don’t really count. Other illiquid assets include lending to businesses.

The result is the Public Sector Net Debt: this is the figure to use. The ONS has the figure – and it is… £940.1bn as of July 2011. Note that this figure excludes some of the cost of bailing out the banks.

Before we come to the bank issue – there’s one quirk which baffles pretty much everyone.

During the credit crunch the Bank of England printed money – the so-called quantitative easing. Precisely £200bn was electronically created by the Bank of England, and it used this money to buy gilts. So today the Bank of England owns £200bn of UK gilts. But the Treasury owns the Bank of England – so in what sense does the British taxpayer really owe that money?

I’ve heard it said that we should not count this money as part of the National Debt for this very reason. As Noddy Holder said: “We owe it to ourselves”.

In fact, when we redeem gilts held by the Bank of England, the money we pay will be destroyed (a process known as “unwinding” the quantitative easing). Which means the taxpayer won’t get that money back. So, yes, we are liable for the gilts owned by the Bank of England, just as surely as if we owed the money to a private organisation.

Does the Bank of England explain that anywhere on their website? No they don’t. Neither do the DMO nor ONS. I had to talk to a senior wonk to confirm that it is indeed the case. He admitted most people wouldn’t have the faintest idea.

So what about the bank bail-outs?

Remember the untold billions we poured into banks such as RBS, Northern Rock and Lloyds TSB at the height of the financial crisis? Now, you might think that the money we borrowed to bail out the banks would show up in the National Debt figures. After all, they are partly to blame for the mess we are in.

But no! The Public Sector Net Debt figure excludes the banking crisis, as though it never happened. The reason for this is that the banking crisis was messy. We don’t know how much the banks are worth. We don’t know what their potential liabilities are. So the ONS draws a big line around the whole mess and deals with it separately.

On rare occasions the ONS does try to put a figure on the cost of bailing out the banks. The ONS claims that if we add in the banks we may have to add roughly between £1,000bn to £1,500bn to the National Debt. This gives a total figure of “unadjusted measure of Public Sector Net Debt Public Sector Net Debt” of about £2,000bn to £2,500bn.

But the “unadjusted” National Debt figure is misleading. For accounting reasons, the main assets of the banks – mortgages and corporate bonds – are not counted. Only the debts. So the “unadjusted” figure is lopsided. In truth, the assets of the banks almost precisely match liabilities. In the real world the direct cost to the taxpayer of bailing out the banks will be between zero to minus £50bn. We might even make a profit, if the market is favourable when we sell the nation’s shares in the banks.

Because of these uncertainties, we’ll stick with our original Public Sector Net Debt figure of £940.1bn, known as PSND ex (as it “excludes” the cost of financial intervention).

Actually, PSND ex does include some of the cash costs of the bank bailouts, such as the £12.4bn we spent on RBS and Lloyds, £1.4bn injection into Northern Rock and £2.7bn depositor compensation for Bradford & Bingley. For more detail on the composition of PSND ex see page 8 of the Office of National Statistics, Statistical Bulletin: Public sector finances, March 2010.

Even more debt to add

There are other debts that the taxpayer owes, which it seems only honest to include in our total National Debt, on top of gilts and NS&I. These are:

• PFI debts
• State pensions
• Public sector pensions
• Network Rail debt

Let’s start with Private Finance Initiative debts. When Labour wanted to spend on NHS hospitals and new school buildings neither Tony or Gordon wanted to raise taxes to pay for this largesse. Taxpayers hate tax rises. And they didn’t want to borrow the money directly – as that too would have looked bad. So they used PFI deals.

PFI is simply a way to borrow indirectly. The building contractor spends the money to build a hospital and the government signs a fixed contact, lasting decades, to pay the contractor to use the building. It is borrowing by another name. For that reason it seems only honest to include PFI as part of the National Debt.

PFI is hard to calculate, as deals are still being done. An official recent figure is £35bn.

Now we need to take a look the money owed to future pensioners. It sometimes gets asked why these would ever be included. We don’t include, for, example, future policeman’s salaries. Why worry about pension payments falling many years from now? The answer is that the money for these pension payments has already been raised in tax, and instead of saved for the purpose it was intended, has been spent.

By contrast, in Japan, money raised through tax for pensions is squirreled away in the Government Pension Investment Fund. That’s $1,400bn managed to pay for future pensions. In Ireland too there is the National Pension Reserve Fund with €24.4bn in it.

The UK has no such fund. State pension liabilities add on £2,700bn. Then there are the pensions for former and present public sector workers. So how much do we owe for those? Pensions analyst Towers Watson calculates the figure using methodology used in the private sector.

The Towers Watson figure is £1,176bn.

This is a legitimate figure to be added on to our growing debt mountain. “Members of public sector pension schemes have a bigger claim on future taxpayers than the investors holding government bonds do,” explains John Ball, head of defined benefit pension consulting at Towers Watson. Ball adds: “The Government has been borrowing off its own employees by promising them pensions in the future in return for work carried out in the past.”

Last up: Network Rail. This is a government owned body, but its debt is not included in official figures (not yet anyway, though there is a move to change this). Since taxpayers are liable for the money owed by Network Rail it seems honest to include Network Rail debt in our total pile of debt. A final £25bn.

Now we have a total figure for the real National Debt.

• Public Sector Net Debt:                       £940.1bn
• PFI liabilities                                       £35bn
• National Savings & Investments         £103bn
• Public sector pensions                        £2,700bn
• State pensions                                   £1,176bn
• Network Rail debt                              £25bn

Total                                                    £4,979.1bn

That’s the figure to quote as our National Debt: £4,979.1bn. It is still growing. By November it will have shot past five trillion pounds.

Who do we owe this money to?

Finally, we might want to ask whom does the taxpayer owe all this money to. That depends on the debt. The state pension debt is owed to current and future recipients of the state pension; the PFI debt is owed to private sector firms, Network Rail to a consortium of banks, NS&I to depositors.

Gilts are bit different: this ONS data tell us who holds our gilts.

As for the red segment - debt owned by overseas entities - it would be nice to know if we owe it to China, Peru or North Korea. The answer is the taxpayer will never know. Nor will the government.

The Debt Management Office does not have access to gilt ownership data. And, as the DMO press officer Steve Whiting said to me, most of the deals are done through nominees anyway, so we wouldn’t have a clear picture even if the ownership data were publicly available.

“We have no idea who holds what” he said. The ONS gathers the information in the chart above using surveys and examining publicly published reports by major institutions. The chart above might, therefore, be inaccurate.

We should be told

The National Debt is a matter of vital importance to our country. We’ll soon be spending twice as much on the interest on the National Debt as we spend on defence. These figures ought to be front-page news.

They are not, partly because neither the Treasury nor the Office for National Statistics has made an effort to explain the problem in a clear manner. The closest attempt I can see is this report by David Hobbs of the ONS. Even he pleads for “greater transparency”. Naturally his figures, as they are part of a report written in 2010, are out of date.

Until we get the facts presented in a straightforward manner, ordinary citizens won’t know whether to panic or stay calm.

Even worse – nor will our politicians.

Thinktank says rich will prosper but 'squeezed middle' will not regain pre-recession earning power for eight years

Millions of ordinary families are unlikely to see their earnings return to pre-recession levels until at least 2020, a report from a leading thinktank has warned. But it predicts that the income of the wealthy will continue to rise over the same period.

The study, which focuses on the state of the "squeezed middle" and is produced by the independent Resolution Foundation, looks at the situation of 10 million adults, who crucially do not rely heavily on means-tested support from the state, and their 5.2 million children.

A report by the foundation last year led to Ed Miliband's championing of the squeezed middle, a part of Britain that the foundation says remains a key political battleground. It says that households without children earn between £12,000 and £29,000 a year to be part of the squeezed middle; homes with children, between £16,000 and £41,000.

On Monday Labour's welfare spokesman, Liam Byrne, will debate the report's implications with Liberal Democrat MP David Laws at the foundation's London offices.

The two have not met since the former Treasury secretary Byrne's infamous note in 2010 to his successor, Laws, which read: "There's no money left." Since then, the UK's economic woes have deepened and the foundation paints a "gloomy picture on incomes for the next decade".

Byrne told the Guardian that Britain risks replicating the US's "lost decade" where the middle class has fallen so far behind the rich that "Time magazine recently wrote its obituary". Byrne said the report underlined the fact that "the government's economic strategy is doing nothing for jobs, which is why wages are stagnating and welfare reforms are doing nothing for working people. The result is inequality between the middle and the top. Working people do not have a government working on their side."

Taking the Office for Budget Responsibility's latest forecasts, the researchers show that if growth remained sluggish for the next eight years the average annual disposable income of people in this crucial electoral battleground, representing a third of the population, would be £20,200 in 2020 – around £1,700 less than in 2007.

It would take growth rates not seen for almost a decade to let incomes in the squeezed middle return to pre-recession levels by 2020.

While such strong, persistent growth might ensure ordinary families recover lost ground, the real winners would be the top half of the country's earners, whose real disposable income would rise by almost 10% by 2020. Even under the slow growth scenario envisaged by the foundation, the top half of society would see incomes rise by 4%.

The report's author, Matthew Whittaker, said there was a "growing inequality of earnings" at the heart of the long-term squeeze. "Members of the squeezed middle did not share in the spoils of economic growth in the pre-recession years, with wages at the median and below stagnating. Gains instead flowed primarily to higher income households and, more particularly, to those at the very top of the distribution.

"If this trend continues once growth returns it may not be just those on low and middle incomes finding themselves left behind in the next decade, but rather the majority of society."

Part of the reason for the disparity in future spending power according to the report is that the incomes of the lower middle class rise more slowly than the rich, with their spending power eroded by fast-rising fuel and food costs. If low- to middle-income households faced the same price rises as higher earners since 2003 in the types of goods they typically buy they would be better off by £427 in 2011.

The report says the squeezed middle also has to cope with a prolonged wage squeeze – with real wages falling 4.2% over the last year – and warns that the most significant cuts to tax credits have yet to kick in. It says that the major recipients of tax credits are facing a further loss of income of nearly half a billion pounds from this April.

According to the report's calculation, this will see 2 million households worse off by £305 in 2012.

Whittaker pointed out that as the coalition's cuts have hit women harder than men, lower to middle-income families are likely to be "hurt twice". There are also dire figures for young people in rented accommodation and for young property owners who had already borrowed too much to get on the housing ladder, leaving themselves dangerously exposed if interest rates rise.

The proportion renting and aged under 35 has soared from 28% to 47% in the last six years alone.

In the same period the number of homes owned by under-35 members of the squeezed middle fell from almost a third from 770,000 to 562,000.

Those with mortgages may be benefiting from record low interest rates, but with one in five signing up to a 100% mortgage before the recession, a quarter of families still spend between 25% and 50% of their income on their mortgage.

Gordon Brown's administration realised too late to do anything about the widening gap. A treasury paper in 2009, obtained by the Guardian, identifies a "squeezed middle" facing stagnant or falling wages since 2004 – believed to be the first official reference to the phenomenon.

To solve this, Brown's Treasury argued in 2009 for removing "low level regulatory burdens" on the industries such as retail and hotels where "squeezed Britain" works. It also suggests finding ways to get 10 hours more per week per household by 2020 by finding ways of making work more family friendly. It controversially called for "the tax and benefit system to transfer £2bn more each year".

Whittaker said the foundation's analysis "shows rising pressure from pretty much all sides".

He added: "continued low interest rates and the start of a fall in inflation offer only limited respite. This will be far outweighed by further deep cuts to tax credits due this April which will come as a shock on top of the continued wage squeeze."

A spokesman for the Treasury said: "The government has taken decisive action to tackle the deficit, which has helped to keep interest rates low for businesses and families. We recognise that people are feeling squeezed and the government is doing what it can to help, reducing fuel duty so taxes on fuel are 6p lower than they would have been, freezing council tax and implementing an increase in the personal allowance in April, taking over 800,000 of the lowest paid out of tax."

Rarely have politicians and business leaders met at Davos against such a gloomy backdrop. The World Economic Forum (WEF) helped to set the tone this month when it issued a chilling dystopian vision of mass youth unemployment, wholly inadequate elderly care provision and widening global inequality. WEF's global risks 2012 report suggested fresh economic turmoil and social upheaval could wipe out gains produced by globalisation. Nationalism, populism and protectionism threatened to take root, it warned.

The world is calling for a bold vision of economic justice to counter dislocation and austerity. But since the global economic crisis reasserted its icy grip after a brief Keynesian impasse, world leaders have failed to deliver one. The inability to articulate a narrative beyond a long, hard march out of economic malaise ultimately caused by politicians' and regulators' failure to adequately supervise the financial system is resulting in a widespread disillusionment with mainstream politics that threatens to undermine faith in democracy.

World leaders need to respond quickly, and business must play its role. A good place to start is talking up the idea that there are mechanisms beyond severe budget cuts to eliminate sovereign debt. There is money in the global financial system that, if accessed and used wisely, could go a long way to mop up deficits and reinvigorate the global economy.

That treasure trove is the $3.1tn of tax, equivalent to 5.1% of global GDP, which according to international campaign group Tax Justice Network is illegally evaded in 145 countries, covering 98.2% of the world's population. In December, Washington-based thinktank Global Financial Integrity confirmed the reality of vast sums of cash flowing freely through an unregulated financial system last month. Developing countries, it said, lost $903bn in illicit outflows during 2009 – a year when economic activity was severely constrained.

The majority of these flows are washed through tax havens. These secrecy jurisdictions act as cover from international tax authorities. Disturbingly, the obstacles placed by the global financial system that would allow individual countries to track down and repatriate this cash are prohibitively burdensome. This is why a new age of financial transparency and accountability is required. Five key reforms would lay the foundations for this:

1. The rapid introduction of multilateral automatic tax information exchange between tax agencies in every single jurisdiction. This would ensure money illegally held offshore was easily identified and accounted for.

2. The introduction of new levels of financial transparency requiring the public disclosure of the ultimate human beneficiaries of companies, trusts and foundations. This is needed to prevent the further subversion of countries' tax bases whether by high net worth individuals, businesses, corrupt politicians, criminals or terrorists. It is also required to restore faith in the rule of law and the democratic process as the current non-disclosure of beneficial ownership is corruption's best friend.

3. The global introduction of country-by-country reporting so that every company has to publicly state financial details relating to its turnover, profits, costs, employees and taxes in every jurisdiction it operates in where its revenues exceed $5m. It is astounding that in the 21st century, it is impossible for citizens in many resource-rich nations to establish whether their country has got a fair deal from its oil, gas or minerals.

4. Concerted international action needs to be taken to ensure the hundreds of billions of dollars lost to exchequers by companies artificially inflating their costs and deflating profits through intra-company transactions – known as transfer mispricing – is identified, contained and reduced.

5. The harmonisation and codification of money-laundering laws to a restrictive level. Even the City of London shows brazen disregard for rules to stop money laundering, according to a report last June by the UK's Financial Services Authority.

Together, these reforms would show that world leaders were acting in their citizens' best interests, and would go a long way to averting WEF's dystopian nightmare.

Britain's economic mix of a big banking sector and low level of benefits leaves the country vulnerable to sharply rising inequality unless it moves rapidly to a "fairer" system of redistributing tax burdens and social opportunities, according to an OECD report.

The thinktank, which last month warned that income inequality among working-age people had risen faster in Britain since the mid-1970s than in any other rich nation – said in a review of 30 years of data on economic crises that economies with big financial sectors amplified the chances of societies becoming more unequal.

The OECD said this effect would be mitigated by generous unemployment benefits, but this "social protection" was unavailable in Britain.

"Britain will see an increase in its inequality in this period unless it acts quickly to spread risks more fairly," said Isabelle Journard, senior economist with the thinktank.

In a series of chapters for the forthcoming publication Going for Growth, Journard outlined Britain's weaknesses. Almost one in five of people aged between 25 and 34 do not have five good GCSEs (or their equivalent), and academic performance is dramatically affected by parental performance, much more so than in other comparable rich nations.

Another issue, said Journard, was that 40% of women were in part-time employment – 15% higher than average among rich nations – which was "almost certainly" related to the fact the UK had some of the highest childcare costs, equivalent to more than 45% of the average wage.

The OECD called for education spending to be better targeted so the poor benefited more from proposed reforms. "The pupil premium is a good idea but we still feel that it could do more to benefit disadvantaged students," it said.

It also called for a shakeup of the way housing is taxed, questioning why house sales did not attract capital gains tax. "UK housing taxation appears to favour wealthier and older households relative to poorer and younger ones. We have seen from America, where this is a big driver of inequality because those who own homes are richer and they do not pay tax on the profit when they sell their homes. This would help to reduce inequality in the coming years," said Journard's colleague Romain Duval.

Duval said Britain's council tax regime was "highly regressive" and needed reform. "In England, the tax liability for properties over £320,000 is only twice the liability for properties of £70,000 and three times the liability for houses under £40,000. Low-income households are entitled to a council tax benefit. However, the takeup is only around 65%."

Duval said the OECD advocated a replacement with "a property tax based on current market values or a land tax".

Imposing austerity measures as countries slow towards recession is a fundamentally flawed response, said Mr Stiglitz, who won the Nobel prize in 2001 for his work on how markets work inefficiently.

"The answer, even though they see over and over again that austerity leads to collapse of the economy, the answer over and over [from politicians] is more austerity," said Mr Stiglitz to the Asian Financial Forum, a gathering of over 2,000 finance professionals, businessmen and government officials in Hong Kong.

"It reminds me of medieval medicine," he said. "It is like blood-letting, where you took blood out of a patient because the theory was that there were bad humours.

"And very often, when you took the blood out, the patient got sicker. The response then was more blood-letting until the patient very nearly died. What is happening in Europe is a mutual suicide pact," he said.

Keynesian economics, which require governments to help sustain demand, suggests that austerity measures should be imposed when an economy is booming, not waning.

Mr Stiglitz pointed out that 700,000 public sector jobs had been cut in the United States in the past four years, removing demand from the system as unemployment spikes. The UK is set to lose a similar number by 2017.

Instead, Mr Stiglitz argued the best economic medicine is infrastructure spending, especially on transport and energy projects. He pointed to China as one country that had successfully combatted financial crises with stimulus packages.

On Monday, George Osborne had told the same forum that the UK's fiscal austerity measures, which have been in place for a year and under which the economy has begun to tip into recession, were the only way to convince the market of the UK's economic credibility.

"When you have a high budget deficit, if you do not have a [disciplined fiscal] plan then you will not have sustainable growth because investors will be worried about investing in your country," the Chancellor said.

However Mr Stiglitz argued that austerity in the UK and elsewhere would not boost confidence. "There will not be a restoration of confidence as long as economies keep falling, and that will continue until [politicians] change economic course. And I do not think that is likely," he said.

Mr Stiglitz said economists are now not debating if the Euro will break up, but how and when it will happen.

"Among economists the discussion is about the best way to end the euro. It could be civilian upset that does it. Youth unemployment in Spain has been over 40pc since 2008. How much longer will they tolerate that? The policies of the new government are for more of the same medicine, except worse.

"The other way it may end is when the European Central Bank refuses to be the lender of last resort for some countries, precipitating a crisis. We can be sure that markets will be highly volatile and the end of the Euro will be a very severe disruption to the global economy," he said.

However, he compared the strictures of the single currency to the gold standard, and noted that countries which had abandoned the gold standard early had recovered more quickly.

"When the Euro was founded, most economists were skeptical," he said, noting that the single currency was a political project that had not satisfied the optimum conditions for a currency bloc. "They hoped they would be able to finish the project over time, but the politics was not strong enough," he said.

Mr Stiglitz also said that while he was critical of the ratings agencies, a decision to downgrade the European Financial Stability Fund (EFSF) on Monday was reasonable. "The EFSF was trying to leverage something out of nothing, and that was never going to work, and they were just saying that it wasn't going to work," he said.

The leaders of the International Monetary Fund, the World Bank and the World Trade Organisation on Friday issued a warning about the economic and social risks of austerity programmes in a "call to action" designed to boost growth and fight protectionism.

Expressing concern about the weakness of economic activity and rising unemployment, the IMF's Christine Lagarde, the World Bank's Robert Zoellick and the WTO's Pascal Lamy joined the heads of eight other multilateral and regional institutions in calling for policies to create jobs, tackle inequality and green the global economy.

"The world faces significant and urgent challenges that weigh heavily on prospects for future growth and on the cohesion of our societies," said the statement by the global issues group of the World Economic Forum. It was published ahead of the forum's annual meeting in Davos next week, amid concerns that 2012 will see the global economy flirt with recession as a result of the eurozone crisis.

"Our shared objective is the strengthening of growth, employment and the quality of life in every part of the world," said the statement. "But entering 2012, we worry about: decelerating global growth and rising uncertainty; high unemployment, especially youth unemployment, with all its negative economic and social consequences; potential resort to inward-looking protectionist policies."

In addition to Lagarde, Zoellick and Lamy, the signatories were Mark Carney of the Financial Stability Board, Margaret Chan of the World Health Organization, Angel Gurría of the Organisation for Economic Co-operation and Development, Donald Kaberuka of the African Development Bank, Haruhiko Kuroda of the Asian Development Bank, Luis Alberto Moreno of the Inter-American Development Bank, Josette Sheeran of the United Nations World Food Programme, and Juan Somavia of the International Labour Organisation. The forum said it was the first time the heads of the world's major institutions had come together in such a way.

Reflecting the IMF's concern about over-aggressive deficit reduction programmes, the joint statement said governments should "manage fiscal consolidation to promote rather than reduce prospects for growth and employment. It should be applied in a socially responsible manner."

The 11-strong group said it wanted to see a comprehensive action plan that could be agreed and implemented at the meeting of the G20 gathering of developed and developing nations in Mexico in June.

"We call on leaders to devote the necessary political energy to deliver concrete actions to exit the crisis and boost growth. Every country, working through its regional economic organisations and development banks and through the international financial and UN institutions, has a role to play."

While acknowledging that the global economy faced severe challenges, the action plan said momentum could be regained by increasing spending on infrastructure and by "beginning to realise the promise of a greener economy". To do so, the world would need an open trading system, resilient cross-border finance, sustainable government finances, determined and coordinated structural reforms and measures to address inequalities in all countries.

In the short term, the 11 leaders said the two most important challenges were to solve the sovereign debt and banking crisis and to restart growth. It urged the implementation of new, tougher regulations for finance and the rapid recapitalisation of banks where necessary.

With more than 200 million people currently unemployed around the world, the call to action said policymakers should "address youth and long-term unemployment to provide decent work prospects, along with country-specific structural reforms that are fairly implemented to achieve faster growth. Through dialogue, labour market reforms can be agreed that can both raise employment levels and ease fiscal adjustment."

It added: "Boosting jobs and investing in human capital is the most promising way of tackling inequality. We support the work of the ILO and others in assisting governments to examine realistic policy options, including cost-effective social policies to cushion the most vulnerable from adversity. Investment should target skills and education and thus equip people for the future.

"Rising inequality calls for heightened consideration of more inclusive models of growth. We must deliver tangible improvements in material living standards and greater social cohesion."

The call for action urged governments to resist the temptation to resort to trade barriers in an attempt to safeguard jobs. "Countries must reaffirm that none will resort to growth-destroying protectionism and demonstrate that trade restrictions introduced in response to the economic crisis will be rolled back."