Nothing best demonstrates the failure of George Osborne’s economic medicine for the UK than the fact that this morning’s data on the UK economy showing 0.2 per cent growth was the best he could have hoped for.
Since many economists feared statistics showing negative growth of-0.1 per cent or -0.2 per cent the chancellor will be comparatively relieved. But the sobering reality is that the Tories have helped to completely choke the recovery promised in the final months of Labour’s time in office. This time last year, the economy had grown by 1.2 per cent in quarter two alone. In the entire year since then it has grown by a measly 0.8 per cent.
The Office of National Statistics has already come up with some wonderful excuses, arguing that growth would have been 0.7 per cent had it not been for the Japanese tsunami, the Royal Wedding and the weather! Away from these government fantasies the bald facts are that, with the exception of crisis-hit Greece, Britain has the slowest growing economy in the EU, while government borrowing this year is far higher than needed for the government to meet the Office of Budgetary Responsibility’s forecast of a £122bn deficit. Britain is rapidly becoming the economic sick man of Europe again.
So what will happen now? Probably very little. The OBR will probably come into line with most economists and make yet another downgrade to its growth forecasts for 2011, probably from 1.7 per cent down to 1.3 per cent. The government has offered a couple of fig leaves, most notably its pledge to allocate £25m to pay for 10,000 apprenticeships. This is a good idea that Labour should support even if £25m is not going to get very far. It has also announced that it will cut red tape on business by reducing government planning policy documents, but this is undermined by the news that red tape on small businesses has increased under the coalition.
We are seeing more signs of government infighting over the misfiring economy. After the News International phonehacking scandal Vince Cable is feeling confident again, and he has proposed a second round of quantitative easing by the Bank of England including the Bank buying corporate bonds as well as government gilts. But loosening fiscal policy by printing money is not going to wash with Osborne and both he and Cameron have already rejected the idea.
The paradox is that the deeper the economic crisis gets the more likely the chancellor is to stick stubbornly to his Plan A. But with the Sun, Daily Mail and a growing number of Tory backbenchers complaining about his lack of narrative and any growth strategy, Osborne is coming under increasing pressure. But while he sticks to the mantra of ‘there is no money’ he will be unable to take any measures to stimulate economic growth and will continue to be, as he currently is, reliant on and reactive to events.
Labour is right to attack Osborne for his economic mismanagement. Osborne’s 2010 budget, with its frontloaded spending cuts and VAT hike killed consumer confidence and it has not returned. The evidence is in collapsing retail sales but also, and more seriously for future growth, in lending to businesses. Analysis published by the British Bankers’ Association shows that business lending fell by £2.5bn in June, following a similar drop in May. This lack of demand for credit demonstrates that small businesses are mindful of the current economic climate and are extremely wary about investing in their business. This has grave implications for the future.
There is also a need to continue to call for growth-creating measures. While reversing the VAT rise would have a large, and almost instant, effect, microeconomic changes could also be effective. Output from the manufacturing and construction sectors has been poor in 2011 – the production sectors declined in quarter two by 1.4 per cent – in large part because of weak demand. Cutting VAT to five per cent in these sectors could help get to stimulate demand and get them functioning again. Similarly, more funding for apprenticeships and job schemes for young people is vitally important to avoid a ‘lost generation’ of youth unemployed.
Britain’s economy is stagnant and unless the chancellor has a sudden change of heart it will stay that way. We may not be statistically in recession but with 4.5 per cent inflation compared with average pay rises that are around two per cent, most Britons are poorer and seeing their living standards get worse under the Tories. Osborne is right to describe the UK economy as ‘stable’ – but only in the same way as a doctor can describe a patient asleep in a coma as ‘stable’.
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Ben Fox is political adviser to a socialist vice-chair of the economic and monetary affairs committee in the European parliament, and is chair of GMB Brussels. He is writing in a personal capacity.