John Philpott: Coalition is betting that the economy can handle its cuts

Wednesday 29 December 2010 01:00

If first footing at midnight on New Year's Day, the Chancellor George Osborne will also have his fingers firmly crossed. The Coalition won the politics of austerity in 2010 by persuading most people that unprecedented cuts in public spending plus higher taxes were unavoidable to avert national bankruptcy.

But Mr Osborne must know deep down that his brand of ultra fiscal conservatism represents a big gamble with the UK economy and that 2011 will be a make-or-break year for the credibility of the Coalition's approach. What makes the gamble so potentially reckless is the heightened sense of uncertainty that pervades the economic outlook. In such a situation, a sensible approach to fiscal policy would be one of caution, not cuts.

Despite this, if all goes well and the unexpectedly strong recovery enjoyed in 2010 is sustained, the economy and jobs market will be able to cope with the impact of the Government's fiscal squeeze without any significant rise in unemployment. But things only have to turn out a bit worse than the Chancellor hopes for things to look far less rosy – we do not need a crisis in the eurozone or premature interest rate hikes triggered by stubbornly high price inflation to seriously darken the economic clouds.

Disappointing official figures published earlier this month, showing that unemployment had risen above 2.5 million well before the impact of the Coalition's austerity measures really started to bite, illustrate how quickly relative optimism can give way to a more sombre outlook. This does not mean that we are facing a return to the dire recession-devastated days of late 2008 and 2009. But in all probability, 2011 will feel like another year in the economic doldrums rather than the start of a return to prosperity.

Most economic forecasters expect some rise in unemployment next year, though not all share my pessimism that there will be around 2.7 million jobless in 12 months. Even if the jobs situation does not deteriorate, the bulk of workers will feel a squeeze in their living standards.

Dr Philpott is chief economic adviser, Chartered Institute of Personnel and Development

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