No case for change on spending
THE keenly awaited figures on gross domestic product (GDP) for the first quarter of 2011 represented what might well rank as the least informative economic data since records began.
With the 0.5% fall in GDP during the last three months of 2010 being attributed by the Office for National Statistics (ONS) to the cold snap in the weeks before Christmas, it was inevitable that there would be some sort of “bounce” in January.
On the other hand, much of the economic data during February was disappointing and while figures in March offered signs of recovery in the services sector, which accounts for two-thirds of the UK economy, they also revealed early signs of a slowdown in manufacturing, which has been the main driver of growth.
Averaging out all of these factors to produce an overall measure of GDP for the first quarter as a whole was always going to be rather like the man who put his head in the oven and his feet in a bucket of iced water: on average, he was quite comfortable.
However, the 0.5% growth figure announced by the ONS, exactly offsetting the negative growth of the previous quarter, means that the economy has remained broadly flat for the past six months.
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As a result, growth forecasts for 2011 as a whole, and for 2012, are now being revised downwards, leading to further pressure on the Government’s strategy of spending cuts, designed to help it balance the current budget by 2016.
Opponents of the coalition’s approach have, of course, seized upon this as evidence that a change of approach is necessary. In fact, such a reversal of policy would make matters worse.
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While loosening the fiscal purse strings makes sense to help the economy ride out a short-term downward blip, a structural deficit of the scale currently faced requires exactly the kind of action the Government is currently taking.
The idea that “buying” growth through increased Government spending will cut the deficit more quickly is an illusion. On the contrary, it would erode international confidence in the UK to such an extent as to damage the nation’s credit rating, resulting in higher interest charges which would make the recovery more difficult still.
And long before this stage was reached, such a fiscal stimulus would, inevitably, have resulted in an increase in the Bank of England’s base rate which, to the credit of the six policymakers who have opposed the three “hawks” thus far, now seems likely to remain at its historic low until the summer.
If the Government’s current approach takes longer to work than previously expected, then so be it. Better that than to risk ending up in the same camp of Greece, Ireland and Portugal.