AUSTERITY has failed, and the Government has no plan for growth, economist David Blanchflower said in Edinburgh yesterday.

Professor Blanchflower said investment subsidies and tax cuts were needed to pull the UK out of recession.

The former member of the Monetary Policy Committee told the National Association of Pension Funds investment conference that he had predicted in early 2008 that "something horrible" was brewing in the credit markets, and he now feared a repeat of that from the European credit markets.

He said liquidity injections from central banks were "consistent with the fact that some banks have gone out to secret funding".

The economist said Bank of England and OBR projections for economic recovery were still as hopelessly optimistic as in 2008 and again in 2010: "We have made the classic 1930s mistake of not realising that the consequences of a large crash take a long time to work themselves through."

He claimed growth under the Labour government had been revised upwards, but the past 15 months marked "the Osborne collapse", adding: "It appears austerity has failed in the UK lab experiment."

He said investment into the Nissan plant at Sunderland showed what was needed to tackle the crisis, along with tax cuts.

Questioned by The Herald on which taxes the Chancellor should cut, the economist said: "He should cut national insurance on young people to zero for two years, and VAT cuts is a perfectly reasonable idea."