Wednesday, 15 December 2010

Do we need a Plan B ?

There has been a certain amount of excitement in the media about a 'Plan B' drawn up by Cabinet Secretary Gus O'Donnell to stimulate the economy should it run into renewed difficulties. There has even been talk once again of a 'double dip recession'.

Barring a cataclysmic crisis in the eurozone I do not think that negative growth is likely. Indeed, the risks of a massive crisis may have been reduced by hints from the United States that it might intervene if things got really bad.

Nevertheless, there is a dismal prospect of relatively low growth (below current forecasts of a little over 2 per cent), rising unemployment as public sector job cuts take effect and continuing inflation well above target. In different circumstances the Bank of England would have already taken action to curb inflation.

Disposal income is being squeezed. Many people are not getting any salary or wage increases or ones below the rate of inflation. The cost of everyday items such as petrol and utilities is going up and petrol in particular will rise further once VAT increases. Because of trends in world commodity markets, the cost of food and clothing has been rising (the depreciation of sterling has also not helped, although that has now come to an end and the pound has been rising against the dollar and the euro recently).

The civil service has always prepared contingency plans for economic difficulty. 'Brutus' and 'Cranmer' were two famous ones in the past and no doubt there are more in the National Archives at Kew. It's sensible to have contingency plans, but it doesn't mean you have to implement them.

David Cameron is understandably very sensitive about the subject because it implies that the Government's deficit reduction plan could be more economically damaging than he admits. My view has always been that the Coalition Government will not manage to eliminate the structural budget deficit over the lifetime of a Parliament, but if you don't start with a tough target, you will fall way short.

No doubt all this will come up at PMQs today.

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