Ministers’ swift handling of the financial crash was applauded at the time. But, with the latest economic data making unhappy reading, does this goodwill need revising, asks David Williams
It is difficult to imagine a more disappointing good news story than that handed to the government by the Office for National Statistics on April 23.
Data published that day showed that, in the first quarter of 2010, the UK economy grew by 0.2%. Not only was the growth dangerously weak, but it represented a slowdown on the previous quarter’s already feeble figure of 0.4%.
Even taking into account the 0.3% margin for error for gross domestic product figures – which could mean a slightly more healthy outlook or the outside chance that the UK has dipped back into recession – the economy continues to teeter on the brink.
For a government needing to justify its post-crash economic policy ahead of the election, it was hardly the sort of thing to start posting on billboards. And it came at the end of a week in which inflation hit 3.4%, the number of unemployed people topped 2.5 million for the first time since 1996 and public finance data showed yet another all-time high for government borrowing: £163.4bn for 2009/10. Meanwhile, net debt hit £890bn – up £157.7bn in a year.
Two more figures cast an ominous shadow over the new financial year: tax receipts fell in 2009/10 to £469.2bn from £495.4bn, while expenditure continued to rise, from £536.8bn to £573.4bn.
Labour argued that voters should not gamble the evidently fragile recovery on a new government.
But the decidedly spotty economic picture was immediately seized upon by Conservative leader David Cameron. ‘We’re hardly racing out of recession,’ he said, framing the issue as a choice between Labour’s ‘tax on jobs’ – the proposed 1% rise in National Insurance – and the Tories’ ability to ‘bring business sense to government’ through cutting waste.
Shadow chief secretary to the Treasury Philip Hammond added that the rising tax take, weak growth and a slow jobs market were reducing families’ spending power.
Vince Cable, the Liberal Democrat Treasury spokesman, attributed the fall in growth to the withdrawal of the fiscal stimulus at the beginning of this year. He warned that cutting public spending could tip the economy back into recession.
So what can this latest batch of data tell us about Labour’s stewardship of the economy since the crash of 2007/08?
The first thing to note is that the astronomical borrowing figures are actually below the £166.5bn predicted just a few weeks ago in the Budget – and that was significantly less than the earlier official forecast of £178bn.
Rowena Crawford, research economist at the Institute for Fiscal Studies, said: ‘Chancellor Alistair Darling will doubtless be pleased that he looks to have borrowed £3.1bn less last year than he predicted in the Budget a month ago.
‘The deficit is still the highest level of borrowing as a share of national income since the Second World War. Reducing borrowing to acceptable levels will be the biggest domestic policy challenge for whoever forms the next government.’
Matt Goodman, policy representative for the Forum for Private Business, compares the government’s approach to supporting the economy to ‘throwing darts at a board, and seeing what stuck’.
But he says Revenue & Customs measures to make it easier for firms to pay off tax debts had helped.
‘It gave businesses the reassurance that they could call R&C to set up a tax plan and they wouldn’t be turned away,’ he says. ‘It gave a lot of smaller firms breathing room.’ But other fiscal stimulus measures, such as the Enterprise Finance Guarantee scheme, were ‘not as effective as some would like us to believe they were’.
Goodman said that withdrawing state support for struggling businesses could put growth at risk. ‘You don’t want to inhibit the recovery trying to push cash back into government coffers.’
Professor Michael Ben-Gad, deputy head of City University’s department of economics, warns against drawing too many conclusions from two quarters’ worth of GDP figures, as ‘these things are inherently unpredictable’.
But he says that the real effects of the government’s actions – particularly sky-high borrowing rates – have yet to be felt.
‘If you borrow, all you’re doing is deferring taxes to the future… there will be long-term repercussions, most of which we don’t feel yet, that are much more significant than whether growth this quarter is 0.3% or 0.4%.
‘Taxes will be much higher, whenever they get around to raising them, and government spending will have to be cut. It’s going to affect growth and prosperity… people are going to have less.’
Ben-Gad suggests that the Bank of England’s quantitative easing programme – effectively flooding the markets with newly created money – could explain the rise in inflation, which does not appear to have been caused by an upturn in demand.
The measure will have contributed to the devaluation of sterling, he says, pushing up the price of imports, which had in turn led to a rise in inflation.
Martin Weale, director of the National Institute for Economic and Social Research, says that even with unemployment at 8%, the rate is still lower than it was under Tory governments from 1979 to 1997, when it averaged 9.2%.
But other indicators show the UK has performed worse than most of its peers since the beginning of 2008, and Weale’s verdict on Labour’s management of the economy is damning. ‘The policy structure has failed,’ he says. ‘No-one could describe the situation we’ve got into as a success.’
According to the NIESR, the UK’s economy shrank by 5.8% between January 2008 and December 2009 – of the G7 countries only Japan and Italy have been hit harder. In the US, where the economy was similarly reliant on the financial services sector, GDP fell by 1.6%. The UK’s fiscal deficit has gone up more than in any other G7 country.
Weale argues that some of the responsibility lies with the Bank of England, which has consistently avoided implementing a US-style programme of ‘credit easing’ – loosening restrictions on the state bank’s ability to lend to the private sector. ‘You can think of good reasons not to do it. Nevertheless, had it actually been done, we would have seen more of a recovery,’ he says.
Weale also contends that last week’s GDP results did little to vindicate the government’s response to the recession. The fiscal stimulus could have been better designed, he says. ‘We had a reduction in VAT. Giving cash handouts at the beginning of last year would have been a better way of getting people to go out and spend it at the time of strongest contraction.’
The government could also have held off fiscal tightening this year, says Weale. ‘It’s a matter of judgement how far you think you can do that without markets getting frightened. Maybe ministers have sailed close to the wind, or maybe as in so many other areas they’ve paid too much attention to their friends who work in the City.’
It is difficult to imagine a more disappointing good news story than that handed to the government by the Office for National Statistics on April 23.
Data published that day showed that, in the first quarter of 2010, the UK economy grew by 0.2%. Not only was the growth dangerously weak, but it represented a slowdown on the previous quarter’s already feeble figure of 0.4%.
Even taking into account the 0.3% margin for error for gross domestic product figures – which could mean a slightly more healthy outlook or the outside chance that the UK has dipped back into recession – the economy continues to teeter on the brink.
For a government needing to justify its post-crash economic policy ahead of the election, it was hardly the sort of thing to start posting on billboards. And it came at the end of a week in which inflation hit 3.4%, the number of unemployed people topped 2.5 million for the first time since 1996 and public finance data showed yet another all-time high for government borrowing: £163.4bn for 2009/10. Meanwhile, net debt hit £890bn – up £157.7bn in a year.
Two more figures cast an ominous shadow over the new financial year: tax receipts fell in 2009/10 to £469.2bn from £495.4bn, while expenditure continued to rise, from £536.8bn to £573.4bn.
Labour argued that voters should not gamble the evidently fragile recovery on a new government.
But the decidedly spotty economic picture was immediately seized upon by Conservative leader David Cameron. ‘We’re hardly racing out of recession,’ he said, framing the issue as a choice between Labour’s ‘tax on jobs’ – the proposed 1% rise in National Insurance – and the Tories’ ability to ‘bring business sense to government’ through cutting waste.
Shadow chief secretary to the Treasury Philip Hammond added that the rising tax take, weak growth and a slow jobs market were reducing families’ spending power.
Vince Cable, the Liberal Democrat Treasury spokesman, attributed the fall in growth to the withdrawal of the fiscal stimulus at the beginning of this year. He warned that cutting public spending could tip the economy back into recession.
So what can this latest batch of data tell us about Labour’s stewardship of the economy since the crash of 2007/08?
The first thing to note is that the astronomical borrowing figures are actually below the £166.5bn predicted just a few weeks ago in the Budget – and that was significantly less than the earlier official forecast of £178bn.
Rowena Crawford, research economist at the Institute for Fiscal Studies, said: ‘Chancellor Alistair Darling will doubtless be pleased that he looks to have borrowed £3.1bn less last year than he predicted in the Budget a month ago.
‘The deficit is still the highest level of borrowing as a share of national income since the Second World War. Reducing borrowing to acceptable levels will be the biggest domestic policy challenge for whoever forms the next government.’
Matt Goodman, policy representative for the Forum for Private Business, compares the government’s approach to supporting the economy to ‘throwing darts at a board, and seeing what stuck’.
But he says Revenue & Customs measures to make it easier for firms to pay off tax debts had helped.
‘It gave businesses the reassurance that they could call R&C to set up a tax plan and they wouldn’t be turned away,’ he says. ‘It gave a lot of smaller firms breathing room.’ But other fiscal stimulus measures, such as the Enterprise Finance Guarantee scheme, were ‘not as effective as some would like us to believe they were’.
Goodman said that withdrawing state support for struggling businesses could put growth at risk. ‘You don’t want to inhibit the recovery trying to push cash back into government coffers.’
Professor Michael Ben-Gad, deputy head of City University’s department of economics, warns against drawing too many conclusions from two quarters’ worth of GDP figures, as ‘these things are inherently unpredictable’.
But he says that the real effects of the government’s actions – particularly sky-high borrowing rates – have yet to be felt.
‘If you borrow, all you’re doing is deferring taxes to the future… there will be long-term repercussions, most of which we don’t feel yet, that are much more significant than whether growth this quarter is 0.3% or 0.4%.
‘Taxes will be much higher, whenever they get around to raising them, and government spending will have to be cut. It’s going to affect growth and prosperity… people are going to have less.’
Ben-Gad suggests that the Bank of England’s quantitative easing programme – effectively flooding the markets with newly created money – could explain the rise in inflation, which does not appear to have been caused by an upturn in demand.
The measure will have contributed to the devaluation of sterling, he says, pushing up the price of imports, which had in turn led to a rise in inflation.
Martin Weale, director of the National Institute for Economic and Social Research, says that even with unemployment at 8%, the rate is still lower than it was under Tory governments from 1979 to 1997, when it averaged 9.2%.
But other indicators show the UK has performed worse than most of its peers since the beginning of 2008, and Weale’s verdict on Labour’s management of the economy is damning. ‘The policy structure has failed,’ he says. ‘No-one could describe the situation we’ve got into as a success.’
According to the NIESR, the UK’s economy shrank by 5.8% between January 2008 and December 2009 – of the G7 countries only Japan and Italy have been hit harder. In the US, where the economy was similarly reliant on the financial services sector, GDP fell by 1.6%. The UK’s fiscal deficit has gone up more than in any other G7 country.
Weale argues that some of the responsibility lies with the Bank of England, which has consistently avoided implementing a US-style programme of ‘credit easing’ – loosening restrictions on the state bank’s ability to lend to the private sector. ‘You can think of good reasons not to do it. Nevertheless, had it actually been done, we would have seen more of a recovery,’ he says.
Weale also contends that last week’s GDP results did little to vindicate the government’s response to the recession. The fiscal stimulus could have been better designed, he says. ‘We had a reduction in VAT. Giving cash handouts at the beginning of last year would have been a better way of getting people to go out and spend it at the time of strongest contraction.’
The government could also have held off fiscal tightening this year, says Weale. ‘It’s a matter of judgement how far you think you can do that without markets getting frightened. Maybe ministers have sailed close to the wind, or maybe as in so many other areas they’ve paid too much attention to their friends who work in the City.’
