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

Share
Related Topics

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.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

SThree: Trainee Recruitment Consultant - Dublin

£13676.46 - £16411.61 per annum + OTE: SThree: SThree Trainee Recruitment Cons...

Ashdown Group: Marketing or Business Graduate Opportunity - Norwich - £22,000

£18000 - £22000 per annum + training: Ashdown Group: Business and Marketing Gr...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + Commission: SThree: Are you great at building rela...

Ashdown Group: Database Analyst - Birmingham - £22,000 plus benefits

£20000 - £22000 per annum + excellent benefits: Ashdown Group: Application Sup...

Day In a Page

Read Next
Labour leader Ed Miliband unveils Labour's pledges carved into a stone plinth in Hastings  

Election 2015: Smash the two-party system! Smash the voting system!

Armando Iannucci
Tactical voting is a necessary evil of the current first-past-the-post system, where voters vote against what they do not want rather than in favour of what they do  

Election 2015: Voting tactically has become more fraught in new political order

Michael Ashcroft
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever