Leading article: The time has come for a new fiscal course

There is no reason why a shift from the Government should set off a market panic
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The Independent Online

The British economy is stagnant. We learned yesterday that the UK's Gross Domestic Product grew by just 0.2 per cent in the second quarter of 2011. The various explanations that have been given for this latest quarter of meagre growth – the royal wedding, the Japanese tsunami, hot spring weather – are not convincing. This follows six months in which there was no output growth at all. Even if this new figure has been artificially depressed by those above factors, a disturbing trend of below-par growth still emerges.

There are no consolations in the figures. Manufacturing has grown well since the recession, helped by the depreciation of sterling. But the latest statistics show that even this area is slowing. George Osborne tried to talk up the figures yesterday calling them "positive news". But there can be no disguising the fact that this is not the position that the Chancellor expected to find himself in when he outlined his emergency Budget last year. Last June, the newly created Office for Budgetary Responsibility forecast growth for 2011 of 2.6 per cent. That has already been reduced three times. And the forecast will probably have to come down for a fourth time in the autumn.

The Government promises that it is looking at supply-side reforms such as deregulation and business tax relief in its efforts to accelerate growth. Such plans might well be desirable. But they will not have any impact on immediate-term economic activity, which is where the problem lies. The Business Secretary, Vince Cable, has suggested that the Bank of England should consider another round of quantitative easing to boost output. But the main problem afflicting the UK economy is a lack of demand. And our banking sector is not lending. Under these conditions, more monetary easing does little except to enrich the financial sector.

The Chancellor, George Osborne, is adamant that the UK cannot budge from its tough fiscal plans since that could lead to a crisis in confidence in the UK bond markets. Changing course on deficit reduction would, he warns, drive up interest rates and inflict still more economic pain than we are experiencing now. Yet those plans are in danger of undermining our weak economic activity even further. Tax rises have already dampened growth. And three years of deep government spending cuts threaten to wipe it out altogether.

The overall goal of eliminating the bulk of the deficit over the next four years should remain. But the time has surely come for the Treasury to start shifting the bulk of the cuts to later in the Parliament. A temporary VAT cut, as proposed by the shadow Chancellor, Ed Balls, also looks like the only quick way at the moment of boosting consumer spending.

Despite what the Chancellor says, market confidence will not be lost by a modification of the Government's fiscal course. Britain is in no danger of defaulting on its borrowings. Our stock of debt has a long maturity. And we have a freely floating currency. Moreover, the markets ought to be able grasp that the present fiscal course is ultimately liable to leave Britain with still more borrowing than if remedial action is taken now. Whatever ministers wish to call it – Plan A plus, Plan B – does not really matter. What matters is that the Government responds to changed economic circumstances and amends its course.