UK Politics

It wasn't supposed to be like this

  • 25 January 2012
  • From the section UK Politics
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Negative growth and the danger of a double dip; debt rising faster and the deficit falling slower than forecast in the Treasury plan laid out when Alistair Darling was chancellor; and the hoped for re-balancing of the UK economy on hold as the manufacturing sector shrinks instead of grows.

The prime minister will, no doubt, point to troubles imported from the eurozone. To which Labour replies that it is the shrinkage of domestic demand that caused the slowing of growth until the end of last year.

The debate about the recent past feels wearisomely familiar. Not so, though, that about the future.

The IMF's chief economist Olivier Blanchard has called on the UK to consider slowing the speed of cuts in the short term to avoid strangling the recovery:

Blanchard: If the economy is doing worse, let the automatic stabilisers work for example, which is the case in the UK, which is partly the case in Germany as well. You can even go further than that, if growth is really dismal then you may decide that you're going to go a bit more slowly about the discretionary part of the budget and for the UK there's some indication that this happened with respect to the revision in potential output, yes to the extent that these countries are not under the gun from the markets, have plausible medium term plans, they can slow down and it would help.

BBC: So we don't need to cut as deep as we were?

Blanchard: You have some room to do something if needed, yes if growth were to be even worse than we have forecast.

BBC: So more flexibility than we thought?

Blanchard: Yes you have, again, there's another issue which is if you have announced the plan and you deviate from the plan you may lose credibility. So given that the UK has announced the plan moving from it is a bit more difficult than it might be for another country.

The organisation's boss, Christine Lagarde, is more diplomatic, perhaps because her demand for more resources for the Fund relies on maintaining good relations with the chancellor and other Treasury ministers.

Inside government there will now be much soul-searching about how to stimulate growth. The much-vaunted package of infrastructure investment, government-backed business loans and a stimulus to the housing market will be examined to see if they are actually delivering.

There is one other intriguing possibility - tax cuts. The coalition is committed to steadily increasing income tax allowances to take poorer people out of tax altogether. At a time when ministers want to prove that they are committed to fairness, an accelerated increase might look rather tempting.

They would also be following the advice of Gus - now Lord - O'Donnell, the recently departed Cabinet Secretary, who included tax cuts on his list of things to do if the economy flatlined. The other things he recommended have, by the way, already been announced.

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