Liberal Democrat cabinet ministers are worried that the Government is not doing enough to boost growth, and are privately pressing the Chancellor to speed up job-creating building projects in his March Budget.
The chief economist at the International Monetary Fund called for Britain’s planned spending cuts to be slowed – in effect for an economic Plan B.
City analysts expect figures published by the Office for National Statistics tomorrow to reveal the economy shrank during the final three months of last year, after a mini-boost from the Olympic Games. A second consecutive quarter of negative growth in the first three months of this year, made more likely by bad weather, would tip the country back into recession.
Simmering behind-the-scenes tensions between the two coalition parties over economic policy have surfaced with Nick Clegg saying: “Wherever we can we’ve got to mobilise more investment into productive capital because the economic evidence is overwhelming. It helps create jobs now; people go on to construction sites; it raises the productive capacity of the economy in the longer run.”
The Liberal Democrats are not calling for a Plan B, which would divide the Coalition on its central mission of tackling the deficit.
But in an interview with Parliament’s The House magazine published today, the Deputy Prime Minister admitted the Coalition made a mistake when it cut capital spending soon after it was formed in 2010. He said: “I think we’ve all realised that ... in order to foster a recovery you need to try and mobilise as much public and private capital into infrastructure as possible. So what we’ve done since then, in effect, is come up with various surrogate ways in getting working capital into infrastructure.” Mr Clegg cited the Treasury’s £40bn of guarantees for infrastructure projects and £10bn for house building.
The Liberal Democrat leader said the Government should “put money back into the pockets of people on middle and low incomes” so they could keep the economic wheels turning by spending on the high street.
Liberal Democrat ministers including Vince Cable, the Business Secretary, are also fighting to protect building projects in a government-wide spending review for 2015-16 now under way. Mr Osborne, meanwhile, is seeking an extra £10bn of cuts.
The IMF’s chief economist, Olivier Blanchard, said yesterday that the continued weakness of the UK economy justified a change of fiscal course. “Slower fiscal consolidation in some form may well be appropriate,” he told BBC Radio 4’s Today programme.
Last May, the IMF, in its annual review of UK finances, recommended that the Coalition should ease up on its austerity measures to support growth if the economy continued to under-perform. “Our early advice is still there,” said Mr Blanchard.
“We’ve never been passionate about austerity. From the beginning we have always emphasised that fiscal consolidation should be slow and steady.
“We said that if things look bad at the beginning of 2013 – which they do – then there should be a reassessment of fiscal policy. We still believe that.”
Mr Blanchard said, “You have a Budget coming in March. We think this is a good time to take stock and see whether some adjustment could be made,” he said.
City analysts have speculated that Britain could lose its triple-A credit rating, which is already on a negative outlook with all three of the main ratings agencies, after public borrowing rose in December.
Mr Osborne, asked about Mr Blanchard’s call at the World Economic Forum in Davos, said that he would be sticking with his existing spending cuts schedule. “I have been prepared to let the automatic stabilisers operate in the UK but I don’t think it’s right to abandon a credible deficit-reduction plan,” he said. “That credibility is very hard-won and very easily lost. It would be a huge mistake to put that at risk”.
The Chancellor received a pre-release yesterday of the official figures for the final quarter of 2013. Asked in Davos about how he would describe the present condition of the UK economy Mr Osborne said: “We are walking a difficult road, but we are heading in the right direction”. He added: “We’re not about to bring that [cuts] programme to an end. We’ve set out a programme of deficit reduction until 2017. Britain still has a high budget deficit. I wish it were not the case. This new Government is having to deal with this.”
Asked whether his current fiscal plans are working, the Chancellor said: “I would say the rebalancing is taking place.”
Treasury sources suggested that Mr Blanchard did not speak for the IMF as an institution. “It’s no surprise coming from Mr Blanchard,” said one a senior source. “Everyone knows there’s a debate in the IMF about this and he’s at one end of it”. The source also pointed out that the IMF called for the policy to be reappraised at the beginning of 2013, but there has been no hard economic data yet showing how this economy has been performing this year.
Nevertheless, other prominent economists backed Mr Blanchard’s call for a change of course. Adam Posen, who left the Bank of England’s Monetary Policy Committee last year and was also in Davos today, said: “I cannot add anything to Olivier’s call, except to say, ‘Right’.”
The shadow Chancellor, Ed Balls, said: “David Cameron and George Osborne must finally heed the IMF’s advice. They have repeatedly warned that a change of course would be needed in Britain if the economy turns out worse than expected. The IMF is now clearly losing patience.
“The longer the Government clings on to its failing plan, the more long-term damage they will do to our economy. David Cameron and George Osborne must now put political pride aside and put the national economic interest first.”
I just want the best: Clegg may send son to private school
Nick Clegg has suggested that he and his wife may send their son to a private secondary school this year.
The admission came during the Deputy Prime Minister's weekly phone-in show on LBC Radio. He said his son, Antonio, could be educated privately when he leaves his state primary in Putney, south London, this summer.
"Like all parents who are sending their children to secondary school in London... there is huge competition for places," said Mr Clegg. "I just want the best for my child and that's exactly what I think most people listening to this programme want for their children..."
Mr Clegg has in the past described the "corrosive" social divisions caused by private education.
Prime Minister David Cameron this week said he plans to keep his daughter Nancy at her state primary school.
Sam Masters
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