David Blanchflower: The economy is not healing but shrinking. Osborne has to spend


It was always going to come to this. Slashing public spending especially investment and talking the economy down when the recovery was still fragile was always going to be contractionary.

Our part-time Chancellor continues to put his head in the sand by sticking to his failed fiscal consolidation plans; in the House of Commons in his Autumn Statement he once again claimed that "the economy is healing" and his economic plans are "on the right track". What planet is he on?

George Osborne made these ludicrous claims even though he had to admit he would not meet his self-imposed fiscal rule of reducing debt as a proportion of GDP by the end of this parliament. The 1 per cent cut in corporation tax is unlikely to be popular given the recent disquiet over big firms failing to pay tax in the UK.

The real cuts in benefits, especially to Job Seekers Allowance, will reduce consumption further and will add to a growing sense of unfairness.

The Coalition has no answer to the terrible data. The economy is demonstrably not on the right track and is not healing but is shrinking. Long-term unemployment has nearly doubled over the past 18 months.

Data from the latest PMIs for services, construction and manufacturing suggest the economy will also shrink in the fourth quarter of 2012. The total deficit has indeed come down by about a fifth in the year to September 2012, compared to the peak in the year to March 2010. But that was achieved by cutting public investment. Over the same period, investment has been halved while the current deficit fell by less than a tenth, but it has been rising slightly for over a year now. The deficit is rising not falling.

When the Coalition took office the OBR predicted in its pre-Budget report in June 2010 the economy would have grown to this point by 6 per cent but in fact it has only grown by 0.6 per cent. Now the OBR is forecasting that the economy will shrink over the course of 2012 by 0.1 per cent.

In a speech in March 2010 Osborne argued the British public should "hold us to account. We will be accountable." According to the YouGov/Sun poll the Labour Party now holds a 14 point lead in the polls, its biggest lead since the election.