Chris Torney, personal finance editor of the Daily Express, says it’s no surprise the economy hasn’t benefited immediately from the austerity measures.
During its first year in power, the coalition government has stressed it needs to make severe cuts to public services to reduce the UK’s deficit and get the economy back on track following the banking crisis and recession.
There have been lots of cuts but the latest GDP figures are nothing to write home about: in the first three months of 2011 the economy expanded by just 0.5 per cent. This followed a contraction by the same amount at the end of 2010, so we’re essentially at a standstill.
More recently statistics from Britain’s manufacturing sector, where output hit a seven-month low in April, have added to the gloomy outlook.
So why aren’t we getting the recovery we were promised?
Cutting the deficit
When the Tory-LibDem coalition came to power last May, ministers said their biggest economic priority was to cut Britain’s borrowing deficit. According to the government, getting the UK to live within its means was the only way to avoid a repeat of the recent downturn and create long-term stability.
Reducing the deficit by cutting public spending (and therefore the need to borrow) is designed to put Britain in a stronger position in international finance markets. The less debt we have, the more likely we are to be able to pay back what we owe, and to be able to continue borrowing.
Why is this important? Well, if the UK is seen as a big credit risk – like Greece, Ireland and Portugal say – our cost of borrowing rises. In a worst-case scenario, this could result in the country going bust and being unable to provide basic public services, for example, without help from other states. This is the economic catastrophe the coalition desperately wanted to avoid.
The rest of the economy
Unfortunately, cuts in government spending and rises in tax are not good news for the wider economy in the short term. This is why recent growth figures are so uninspiring.
Firms which traditionally do a lot of business with the state have struggled; laid off public-sector workers will stop spending, as will those who are worried about their jobs. All these factors lead can to lower confidence in the economy and lower growth.
It was hoped that the private sector would lead the recovery but it too has been hampered by low consumer spending, not to mention high fuel prices and inflation – issues which, to some extent, are beyond ministers’ control.
What’s the outlook?
The banking crisis and subsequent recession was a huge shock to financial systems all over the world so it’s no surprise that recovery is proving to be a slow process. The coalition’s view is that there is no gain without pain but unfortunately the gain looks likely to be delayed for a year or two at least.
We can realistically expect to enjoy decent growth levels in the next couple of years provided Britain can keep its deficit in check and avoid slipping back into recession, which would hugely damage confidence. But a sudden improvement in our fortunes is, alas, very unlikely.
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