PM dampens economic stimulus hopes

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Indy Politics

Prime Minister David Cameron today poured cold water on hopes that tax cuts or a fresh round of money-printing may be deployed to stimulate the economy, on the eve of what are expected to be weak growth figures tomorrow.

Pressure on the Government to announce a "plan B" for the economy will increase if tomorrow's GDP figures show the UK undershooting earlier predictions of 0.5% growth over the three months to June.

Most City economists have trimmed their own forecasts back to 0.1% or 0.2%, with some even predicting negative growth.

Business Secretary Vince Cable yesterday suggested that the Bank of England could stimulate a sluggish economy with a further injection of money through so-called "quantitative easing", while Chancellor George Osborne has hinted that he would like to cut taxes on business.

But Mr Cameron today insisted that there was no leeway for either fiscal stimulus through tax cuts or public spending increases, or monetary stimulus in the form of the Bank reducing interest rates or printing money.

Asked whether tax cuts or quantitative easing were options, the Prime Minister replied: "There's no country, really, that can afford another fiscal stimulus. They've all run out of money.

"There isn't some great monetary stimulus you can give when interest rates are as low as they are.

"The right step for an economy like ours is to get on top of your debt and your deficit and then make it a better place for businesses to grow and expand and employ people."

Speaking at a 10 Downing Street press conference with his Spanish counterpart Jose Luis Zapatero, Mr Cameron acknowledged that "our path back to growth is a difficult one and has already been a difficult one".

But he insisted: "I'm confident we are taking the right steps to get on top of our debts and our deficit, to take Britain out of the danger zone in Europe, to get our economy moving."

Labour have been calling for an economic 'plan B', insisting that the Government's policy of using tax rises and spending cuts to eliminate the national deficit by the end of the Parliament risks choking off growth by cutting "too far and too fast".

They point to earlier Office for National Statistics figures showing a decline of 0.5% in the final quarter of 2010 and growth of 0.5% in the first three months of 2011 as proof that the economy has been "flatlining" since the coalition came to power.

Weak figures from the ONS tomorrow would heap more pressure on the Chancellor to come up with an alternative strategy.

But Mr Osborne today insisted his tough deficit reduction plan has been "vindicated" by events.

The "very difficult decisions" of the past year had not made him popular politically, but had been "justified" by the low interest rates and strong credit status which resulted, he said.

Speaking at a press conference at the Foreign Office, Mr Osborne said that the UK has not faced the same question marks as other high-deficit countries over its ability to pay its debts.

"I think that is a vindication of the decisions we took," said the Chancellor. "We turned Britain into a safe harbour from the storm. That has not been easy."

He dismissed suggestions he had acted in a "reckless" way, saying: "I think I am taking the right decisions that anyone in my position would have to take."

As well as reducing spending, Mr Osborne's strategy relies upon the economy growing. But economists warn that manufacturing, services and construction may be too weak to cope with the fiscal squeeze.

Manufacturing output rose by 1.8% between April and May but has still "shifted down a gear recently", say observers, with output over the past three months lower than the previous quarter.

The services sector, which accounts for some three-quarters of the economy, grew at 0.5% over the past three months, down from 0.8% in the previous quarter.

A number of one-off features such as the Japanese earthquake and an extra bank holiday will further complicate the picture, with even the sale of Olympics tickets possibly having an impact as they will be included in the figures measuring consumption.

Opposition politicians have already called for the Chancellor to reverse the VAT rise that came in at the start of the year.

Shadow chancellor Ed Balls accused Mr Osborne of leading the country into a "Greek-style" trap through cutting back too quickly, adding that unless you have got "people in work paying taxes, the economy growing" it is hard to get deficits down.

Howard Archer, chief European economist at IHS Global Insight, expects the GDP number to make very disappointing and worrying reading.

He said: "IHS suspects that the economy only eked out growth of 0.1% quarter-on-quarter in the second quarter after activity was flat overall through the first quarter of 2011 and the fourth quarter of 2010."

In the first three months of 2011 the UK economy grew by 0.5%, as it bounced back from a weather-affected last three months of 2010 that saw a decline of 0.5%.

A weak second quarter performance will reinforce expectations that interest rates are set to remain at a record low of 0.5% until well into 2012.