Thursday, 28 April 2011

Calm down, dear - it’s only a deficit emergency

It is becoming clear that Cameron and Osborne have shattered business and consumer confidence with their heavy-handed approach to reining in the national debt, writes Heather Stewart in the Guardian

In the glorious April sunshine the union flags were fluttering outside Westminster Abbey and scores of Royal rubber-neckers with tents and deckchairs were already reserving their pitches for the big day. Just around the corner, in the characterless Church House conference centre, the bunting was noticeably absent as Britain's top statistician sombrely announced that the economy had been "on a plateau" for the past three quarters.

"It's not been declining, but it's not been growing either," said Joe Grice, number-cruncher in chief for the Office for National Statistics, with typical understatement. Strip away his scrupulous objectivity and news that GDP expanded by 0.5% in the first three months of 2011 revealed an economy that is flat-lining.

Put it this way: if your usual take-home pay is £2,000, and you find yourself unexpectedly short by £100 one month (because of an unpaid "snow day" or two, perhaps) you don't crack open the champagne if your wages are restored to normal a month later. With the snowdrifts cleared, output from the UK economy in the first three months of this year was exactly the same as in the third quarter of 2010, just after the coalition took the reins.

Grice admitted that, taken together, the figures were equivalent to two quarters of zero growth, or as Tony Dolphin of the Institute for Public Policy Research put it, "as close as it is possible to come to a recession without actually being in one". The GDP data prompted an almighty bust-up in the Commons, with the prime minister insisting it was "good news," and urging Labour's Treasury spokeswoman Angela Eagle to "calm down, dear".

The remark betrays not only Cameron's casual sexism, but the fact that he's seriously ruffled. The coalition's entire economic strategy is based on the ideological belief that if the government presses on with its "emergency" cuts programme, bringing the deficit under control and shrinking the bloated state, it will restore confidence and unleash economic growth.

That certainly hasn't happened yet. Beyond Westminster, the day brought more of the drip, drip of depressing news that has become the familiar background music to the long slog back to economic normality. Seven hundred jobs are to be lost at the troubled telecoms firm Nokia; almost two hundred staff are to go at posh conservatory-maker Amdega, which has gone bust; and cut-price clothes store Primark said its margins are being squeezed as it battles to avoid passing on rising costs to price-conscious shoppers.

Treasury officials pointed to strong tax receipts in March and rising private sector employment as evidence the economy is gaining momentum and should strengthen. They were also keen to point out that the construction sector, which according to the ONS declined by 4.7% in the first quarter, dragging the overall GDP figure down, has been very volatile, even keenly supplying the geeky fact that construction output declined for 11 quarters even in the boom years between 2000 and 2007.

Some of the weakness in the building trade may have been carried over from the weather-related shutdown at the end of 2010. But taking the figures at face value, one obvious explanation is the sharp decline in public sector net investment since the coalition came to power.

It will be hard to tell what's happening over the next couple of months, as data will be distorted by the extra bank holiday, though the loss of output should be partly offset by bumper sales of bunting, commemorative tea towels and sun cream. The omens are not good. The bulk of the cuts are yet to come, while the squeeze on household income from rising taxes and weak wage growth, already the worst in living memory, is getting tighter still.

Any government taking power in 2010 would have had an extremely difficult balance to strike. They had to convince sceptical City bond investors they were serious about restoring the public finances, while nurturing the nascent recovery. But with their single-minded determination to portray the deficit as a national emergency, Osborne and his colleagues charged ahead like a herd of bulls in the proverbial china shop — and it looks increasingly as though they've smashed the recovery to smithereens.

Heather Stewart, the Guardian