Leading article: Economic contraction will have political consequences

Ed Balls, the shadow Chancellor, is on the verge of being able to claim vindication

Share
Related Topics

The snows have disappeared, but a chill nevertheless crept up the spines of Coalition ministers yesterday. The latest figures from the Office for National Statistics, indicating that Britain's GDP contracted by 0.5 per cent in the final quarter of 2010, have left fiscal hawks grasping for reasons for optimism.

George Osborne stressed the reasonably robust performance of the manufacturing sector, and the economic disruption caused by the snow late last year, insisting that "we will not be blown of course by bad weather". Yet, as the ONS pointed out, even without the disruption brought on by heavy snow last month, growth would have been flat. It seems that in 2010, the UK's first full year out of recession, the economy grew by 1.4 per cent. That is hardly the robust expansion required to restore the country back to economic health.

Some hawks have put the disappointing figures down to "construction effects". But though the construction surge of the third quarter of 2010 manifestly fell away, that was because government building projects came to an end. That merely demonstrates how reliant the recovery was on public spending last year. This reinforces the argument for maintaining government stimulus, not removing it.

Yesterday's figures could not be worse timed from the point of view of the Government's aggressive deficit reduction plan. The VAT hike earlier this month was expected to cause consumers to bring their spending forward. If it did so, the benefits for retailers were unspectacular. And now the rate rise promises to depress consumer demand further.

The cost of living is on the increase too. The Governor of the Bank of England warned in a speech in Newcastle last night that inflation could hit 5 per cent this year. Rising prices are prompting calls for interest rate rises, which would increase the cost of borrowing throughout the economy. And the bulk of the public spending cuts from Mr Osborne's emergency Budget have yet to be felt. Tens of thousands of public employees are expected to lose their jobs this year. Youth unemployment already stands at almost 1 million. A private sector this weak is most unlikely to create sufficient jobs to meet the imminent explosion in demand for employment. The outgoing head of the CBI, Richard Lambert, criticised the Government earlier this week for focusing on cutting the deficit while neglecting to offer a serious programme for growth. Those criticisms now look prescient.

There will be profound political implications unless growth is shown to have rebounded strongly in the first quarter of 2011. The credibility of the Chancellor is on the line. The Liberal Democrat leadership, who took a gamble that the economy would survive the Conservatives' fiscal medicine, is going to find itself under increasing pressure. As for Labour, the new shadow Chancellor, Ed Balls, is on the verge of being able to claim vindication for his warnings that the Coalition's programme would derail the recovery.

The Conservatives tried to go on the offensive against Mr Balls yesterday, pointing out that he disagreed with the plan drawn up by the former Labour Chancellor, Alistair Darling, to halve the deficit in four years. But with the return of the spectre of a double-dip recession, Labour's historic disagreements on the deficit shrink into irrelevance. A Conservative Chancellor has embarked on the most severe fiscal consolidations in 30 years, explicitly rejecting any thought of a "Plan B". That suddenly looks less like bravery and more like supreme recklessness.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

SAP Project Manager

competitive: Progressive Recruitment: SAP PROJECT MANAGER - 3 MONTHS - BERKSHI...

SAP Project Manager

competitive: Progressive Recruitment: SAP PROJECT MANAGER - 3 MONTHS - BERKSHI...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Microsoft Dynamics AX Functional Consultant

£65000 - £75000 per annum + benefits: Progressive Recruitment: A rare opportun...

Day In a Page

Read Next
Children of a bygone era  

Kids these days aren't what they used to be — they're a lot better. So why the fuss?

Archie Bland
A suited man eyes up the moral calibre of a burlesque troupe  

Be they burlesque dancers or arms dealers, a bank has no business judging the morality of its clients

John Walsh
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices
Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

Could smartphones soon be diagnosing diseases?

Health Kit and Google Fit have been described as "the beginning of a health revolution"
Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

Can we learn to love Ryanair again?

Four recent travellers give their verdicts on the carrier's improved customer service
Billionaire founder of Spanx launches range of jeans that offers

Spanx launches range of jeans

The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
10 best over-ear headphones

Aural pleasure: 10 best over-ear headphones

Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

Commonwealth Games

David Millar ready to serve up gold for his beloved Scotland in the end
UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

UCI Mountain Bike World Cup

Downhill all the way to the top for the Atherton siblings
Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star