Thursday, 29 January 2009

Bad news week

Two reports from authoritative sources yesterday cast doubt on Labour's argument that Britain was particularly well placed to withtstand the global recession. First, there were the latest economic forecasts from the International Monetary Fund: IMF

Downing Street spun this as saying that the British figures were not much worse than those for Germany and Japan, but this is being economical with the actualité. The UK economy is forecast to shrink by no less than 2.8 per cent in 2009 and to grow by only 0.2 per cent in 2010, the worst slowdown since the 1930s.

Admittedly, the euro area is going to shrink by 2.0 per cent and will also grow by only 0.2 per cent in 2010 (which doesn't help British exports). However, a more relevant comparison is for all advanced industrial countries which are forecast to grow by 0.5 per cent this year and by 3 per cent in 2010. Britain is more exposed to the global economy than many countries, but even a comparison with the US is not helpful with a 1.6 per cent decline there this year offset by 1.6 per cent growth in 2010.

The figures for 2010 should give Dave Cameron pause for thought suggesting that the economy will still be in the doldrums should he become prime minister. With that in mind he should be careful about talking down the economy too much.

Even more worrying for Labour is the latest Green Budget from the Institute for Fiscal Studies: IFS
This suggests that some of Labour's key objectives to transform British society look to be increasingly unattainable given the prospect of a freeze on governmnent spending and real cuts from April 2011. Increases of 1.1 per cent a year in real terms would be taken up by higher debt repayments and higher spending on social security and public sector pensions.

Even with spending cuts and tax increases of £20bn a year, public sector debt will not return below the ceiling of 40 per cent of national income which Gordon Brown set as one of his fiscal rules before the early 2030s. Of course, the 40 per cent figure is an arbitrary one and has no particular rationale other than a political choice.

One crumb of consolation is that the IFS gives rare praise to the efficacy of Labour's cut in VAT. Overall, however, it is a bleak picture for Labour, reflected in double digit leads for the Conservatives in a number of recent polls.

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