The government should cut taxes and overhaul the Bank of England’s “restrictive” remit as part of a radical new pro-growth strategy to accelerate the recovery from the coronavirus crisis, according to a free market thinktank with close ties to the Conservative party.

Policy Exchange, which was co-founded by Cabinet Office minister Michael Gove, warned ministers to take a relaxed view of rising levels of debt and use cheap credit to boost the economy and protect jobs.

Amid widespread concern that the coronavirus pandemic will push unemployment to levels last seen in the 1980s, the thinktank said cheap borrowing costs would allow the Treasury to increase the deficit further to boost growth.

It recommends a cut to VAT and stamp duty on house sales to boost consumer spending and kickstart the housing market.

The chancellor is known to be concerned at the rising public spending deficit, which could top £320bn this year and push the UK’s debt-to-GDP ratio above 100%. He has come under pressure from some quarters of the Tory party to reveal what tax rises he would impose as part of an austerity package over the rest of the parliament to reduce the deficit.

Policy Exchange is one of the most prominent free market thinktanks to accept that government cash should be used to rebuild the economy over the next few years, though others, including the Adam Smith Institute, have argued against a return to austerity.

Policy Exchange consultant Gerard Lyons, who was economic adviser to Boris Johnson when he was mayor of London, said the Bank of England should be forced to develop policies that achieve a GDP growth rate of 4% before inflation. This will allow it to be more aggressive in its stimulus programme.

At the moment Threadneedle Street uses its firepower to keep inflation “anchored” at about 2%, which critics, including Lyons, believe makes it more restrained in its actions. At the central bank’s last meeting, seven members of its nine-strong interest rate setting committee voted against a £100bn increase in its financial stimulus programme, citing concerns of a long-term increase in inflation.

Lyons said inflation was gong to remain low for a long time and so would interest rates. Inflation in April tumbled to 0.8%, its lowest level in four years, as the demand for goods collapsed during the lockdown.

Polling by Policy Exchange of public attitudes to debt and taxes showed there was no appetite for a return to austerity. A majority feared a rise in taxes to pay down the nation’s debts.

Only 16% of those polled support spending reductions that would impact public services, while 49% of the public said tax rises should be limited as the government seeks to deal with the coronavirus fallout. 

The thinktank said in its pro-growth economic strategy paper: “The low cost of debt means the UK should not attempt a fiscal consolidation post-crisis and let higher debt take the strain of higher spending and borrowing.

“Cuts to spending, or increases in taxation, run the risk of undermining any recovery and make little sense in the current economic environment,” it added.

Warwick Lightfoot, the thinktank’s head of economics and a co-author of the report, said: “In the present crisis, perhaps the most serious since the 1930s, when monetary policy is not available as an effective instrument of macro-economic stimulus, the costs for governments of using debt and fiscal policy are at their lowest in modern financial history.

“The combination of very low inflation and a surplus of international savings has resulted in extraordinarily low interest rates and long-term government bond yields. This is not the time to hold back on borrowing.”