Time for Plan B

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Today’s dismal GDP figures mean that it’s time for the Chancellor to explore a more flexible, long-term approach to cutting the deficit    

George Osborne was always going to put a positive gloss on today’s growth figures. With on-going volatility in the neighbouring Eurozone and political paralysis in Washington at the top of his cue card, the Chancellor greeted the ONS results as evidence that the UK economy is stable and standing out as a ‘safe haven in the storm’.

But deep down Osborne will most certainly be worried. Today’s figures, which come amid reports that Number 10 is getting increasingly impatient with the feeble state of the recovery, show that the economy effectively continues to flatline as it did in the six months after September 2010.

As a result, it looks as if the OBR’s latest prediction of 1.7 per cent growth in 2011 will bevirtually impossible to acheive. Even if the economy gets back on track in Q3 and Q4, 2011 growth will barely hit 1.2 per cent – less than half its original prediction of 2.6 per cent which was made in June 2010. The OBR has already been forced to downgrade its growth predictions on three previous occasions. It now appears likely that it will have to do so for a fourth time.

But the reality is the Chancellor will have seen today’s figures coming. In the last month alone consumer confidence, lending to businesses and service sector output all declined while retail sales struggled to rebound following a severe dip in May.

Outside of London, the recession continues to be felt by households and business. In the services sector, the largest contribution to growth in today’s figures is in finance and business services, which are both clustered in an around the capital. And, despite the government’s desire to ‘rebalance’ the economy, manufacturing is down by 0.3 per cent and total production output by 1.4 per cent compared to the last quarter – a sign that the export-led recovery continues to stutter after last month’s widening of the trade deficit.

For all intents and purposes the UK economy might as well still be in recession, even if technically it is not. While the ONS attributes part of the blame to ‘special events’ – the additional bank holiday, the Royal Wedding, and warm weather in April – the Chancellor must now allow himself some room for manoeuvre.

There is an alternative. IPPR has arguedfor a more flexible ‘Plan B’ approach to cutting the deficit – one that is responsive to both economic conditions and market concerns. This should be pursued alongside concerted efforts to boost growth by re-injecting demand into the economy and increasing investment in infrastructure and housing.

Relying on thenotion that fiscal retrenchment alone would provide the necessary confidence and space for businesses growth and consumer spending was always going to be a gamble for the Chancellor. Indeed, if growth remains stagnant, tax revenues will remain low and our borrowing requirements will increase, further harming our fiscal position.

George Osborne’s reluctance to explore a more flexible, longer-term approach to cutting the deficit will mean that long term economic growth continues to elude him. It’s time for Plan B.

David Nash is Research Fellow at IPPR

 

 

One comment on Time for Plan B

  1. Ben says:

    David, this all rather depends on whether the slow down is caused on the Supply side or indeed the Demand side. There is little evidence to suggest that Plan B would be anymore effective, the overall issue is that the Country is a series of individuals paying off debt and reducing consumption. Allowing the government to fill that gap is simply going to create ‘crowding out’ effects. The time lag between the policy and the impact, means the current quaterly GDP estiamtes are no reason to rubbish a medium to long term ambition that hte chancellor is pursuing. Agreed, more needs to be done to increase business confidence, but this in itsefl will take time to flter through.

    Plan B is either a damn good musician or a limp attempt at trying to justify an equally uncertain alternative. Simply propping up supply with government expenditure is not an alternative to trying to readjust away from reliance upon consumers who cannot afford the increase supply in the first place.

    Whilst the long run is far beyond being too obsessed by quarter figures that are often revised anyway is more the second definition of a plan B.

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