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This post originally appeared at GlobalPost.

Unemployment is up, the economy contracted in the last quarter, so austerity cuts are biting, right?

That has been the tone of not only my reporting in the last year but all reporting about the British economy. It has been the framework for political criticism by the opposition Labour party.  Its mantra has been “too far, too fast.”

A report released yesterday by the Institute for Fiscal Studies  puts all that in a different light. The IFS is the most respected independent economics think tank in Britain, its pronouncements frame the debate. This is what it found:

Just 2.3 percent of the austerity cuts have been carried out. That means, according to the IFS director Paul Johnson, “More than £9in every £10 of planned public service spending cuts is still to come.”

In some ways that is not a surprise. Not since World War 2 has there been such a sustained period of cuts put in place. Just planning for them must take an enormous amount of time. But what is shocking about the IFS report is this: with so few cuts put in place the British economy is already tanking.

Here’s the money quote from the report, as far as I’m concerned.

“The austerity program has been a significant drag on growth in recent quarters … The austerity program has also dampened net job creation.”

I think that is stating the bleeding obvious, but the fact that it comes from the IFS gives it weight.

Throw in the fact that the euro zone crisis has slowed economic activity throughout the EU and you get a situation where growth through trade will be anemic at best in the next couple of years.

The IFS suggests that Chancellor of the Exchequer George Osborne come up with a £10 billion ($15.7 billion) stimulus in his budget to be presented next month to help Britain out of recession. This could be achieved through tax cuts or increased spending.

The IFS has been hawkish about deficit reductions in recent years. This suggestion represents a serious change of position.

The government says it will not ease up. If you consider that the economy has contracted with so few of the cuts actually made you wonder what will happen when the other 90 percent of austerity cuts to state spending are put in place.

And even if the de-leveraging program is completed as planned by 2016, it will only reduce the size of government spending back to what it was in 2005.

Lots of pain, for not much gain.

Why?

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Most people are aware that the labor participation rate — the percent of the population that is both unemployed and unemployed (i.e. the total labor force) — has declined precipitously since the recession,  now standing at 64 percent.

Take out the unemployed, and that ratio declines even further.

This figure, called the unemployment-population ratio, stood at 58.5 percent in December — a 6.6 percent drop from 2007.

Credit Suisse’s Neal Soss and Henry Mo recently wrote a paper discussing what effect this decline will have on GDP.

A long stretch of low employment-population ratio suggests that the economy loses the productivity that would have come from those “idle” workers. This syndrome reduces potential GDP, the only ultimate wellspring of fiscal solvency and economic well-being.

Why is the emp-pop rate falling?

They first point out that population has been aging significantly. Due to these structural factors, the rate’s been declining since 1996.

But the Great Recession has put the decline on steroids.

The authors found that only one-third of the ratio’s recent acceleration can be chalked up to shifting demographics (ie aging population). The rest results were brought on by cyclical factors (ie plummeting demand from a weak economy).

Soss and Mo believe the only way to address this problem is with counter-cyclical policies, which leads to the author’s final prediction: QE3 remains likely.

The FOMC’s decision to push its forward guidance on exceptionally low rates from “at least through mid-2013” to “at least through late 2014” underscores members’ sense of urgency in taking more counter-cyclical policy. In our view, QE3 is still likely. We expect a program to commence in the next few months with a heavy emphasis on buying mortgage-related securities.

Now click here to see the only states that have regained most jobs lost during the recession >

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The UK economy needs a fiscal boost of £10 billion to £20 billion in order to avoid another recession, a leading think tank said today.

In its annual Green Budget, The Institute for Fiscal Studies calls for Chancellor George Osborne to include a short-term fiscal stimulus in his budget.

This would buffer the UK economy against the eurozone crisis and the possibility of another recession which could see GDP falling in 2012 and 2013, and a substantial increase in national debt.

The stimulus could take the form of a temporary reduction in employers’ National Insurance contributions or VAT, or could be achieved by increasing investment spending.

‘Should the eurozone break up, or the economy do much worse than forecast for other reasons, then future borrowing would be increased and one – or both – of the Chancellor’s fiscal targets would be broken,’ the IFS said.

The think tank has cut its forecast for UK economic growth to just 0.3 per cent, substantially lower than Government’s 0.7 per cent target.

The report claims that the scale of the government’s austerity strategy is “almost without historical or international precedent” but by the end of the current financial year only 6% of the cuts will have been implemented.

The government is expected to beat its 2011/12 deficit reduction target of £127 billion by £3 billion.

IFS director Paul Johnson said: “The Chancellor faces his third Budget with the economy and public finances in considerably weaker shape than he had hoped a year ago.

“While it looks as though central Government is going to underspend against tight spending plans, this neither leaves much space for any permanent fiscal loosening nor avoids the fact that the vast majority of the planned – and unprecedentedly big – public service cuts are still to come.”

There was also some good news on the economy today, with Markit’s/Cips’ purchasing managers’ index (PMI) revealing that the UK manufacturing sector has returned to growth.

In January, activity in the manufacturing sector was at its highest level for eight months, reaching 52.1 points on the PMI index, where a reading above 50 indicates growth.

This represent a significant improvement from 49.7 in December, with manufacturing output and new orders increasing while manufacturing costs fell.

Economic uncertainty and the threat of another recession is causing consumers to take charge of their finances and cut back on debt according to the latest figures from the Bank of England.

Personal debt, excluding mortgages, fell by £377 million in December, the biggest fall since records began.

Howard Archer an economist at Global Insight said: “Consumer desire to get a tight grip on their finances is clearly the consequence of current heightened concerns over the outlook for the economy and jobs.

“Consumer confidence was at one of the lowest levels on record in December, and while it rose in January, it was still extremely weak compared to long-term norms.”

According to market research firm GfK NOP, consumer confidence recovered slightly this month, with an increase of four points to minus 29, its highest level since June 2011.

The improvement suggests that consumers are becoming more optimistic that the economy and their own finance will improve, even though GDP contracted 0.2 per cent in the final quarter of 2011.

GfK NOP attributes this improvement in consumer confidence to a fall in inflation and a sense of optimism carried over from the Christmas celebrations.

Last week Aviva published its Family Finance Report which suggests that families may be struggling with debt more that other groups.

The report suggests that family debt excluding mortgages has increased by 48 per cent in the last twelve months to £7,944.

Families have taken on another £2,500 in loans and credit card debt to fund the increase in their living costs, which have outstripped the average increase in incomes of around 7 per cent.

Credit cards account for the largest proportion of unsecured personal debt, with families owing an average of £2,314 on their cards.