IN the end, the economy did grow. But a 0.2 per cent expansion in the second quarter, leading to growth of just 0.7 per cent over the past year, is pretty pathetic. The official figures almost certainly under-estimate the actual growth because of the way they measure construction output, and early GDP estimates get revised upwards over time. But despite all of that, and the fact that there were a number of one-off reasons for the poor performance, including the royal wedding and disruptions to the global supply-chain from the Japanese tsunami, the UK is not growing fast enough.
There are many reasons for that, with the coalition partly to blame; but George Osborne’s planned reduction in the budget deficit from £142.1bn in 2010-11 to £122bn in 2011-12 is not responsible for the slowdown. Britain needs to borrow £334m a day (excluding roll-overs) and desperately needs to keep on the good side of those institutions that are willing to lend it so much at such ridiculously low rates.
This year’s planned £20bn reduction in the budget deficit, which will probably end up being closer to £13bn, is the absolute minimum needed to show Britain’s creditors that the government is serious. It is astonishing that some economically illiterate commentators are calling on Britain “to pay its debts down more slowly” as a result of yesterday’s figures – the truth is that the debt pile is still rocketing, albeit at a slightly less rapid rate. Public spending is still going up by two per cent or so in cash terms – it is probably falling in real terms but even that is disputed by some, such as John Redwood, the Tory MP, who believes that the rate of inflation on public spending is much lower as a result of the public sector pay freezes.
What the Labour party is calling for is an even smaller reduction in the deficit – they want to spend and borrow even more than Osborne, oblivious to the fact that creditors are wary of irresponsible governments who believe that they can add hundreds of billions of pounds to their national debt with no consequence.
It certainly makes no sense for the government merely to sit tight and hope for growth to accelerate. Late last year, Britain’s prospects looked rosier; my favourite indicators, including polls of purchasing managers, as well as Deloitte’s survey of CFOs, indicated much growth of the order of 1.8 per cent. It was not to be. All the surveys turned more bearish several months ago, though the economy would still have grown by 0.7 per cent this quarter in the absence of one-off factors, the Office for National Statistics said.
If growth remains weak, Osborne will have to increase his spending cuts. His real gamble has been to push most of these cuts to later years and front-load tax hikes. The composition of his overall fiscal tightening has been misguided: the UK’s problem is too much state spending, not that taxpayers don’t contribute enough.
Boris Johnson is right: the top rate of income tax, which yields either very little or even reduces the tax take by discouraging activity, should be abolished to show that Britain is open for business once more. Johnson is playing a clever game: his economics are far more optimistic, pro-growth and imbued with supply-side understanding than Osborne’s. Johnson is sounding more like a Ronald Reagan on tax; Osborne is more of a traditional fiscal conservative. The Chancellor could learn a trick or two from City Hall’s approach to life.
Follow me on Twitter: @allisterheath