The UK’s recent growth figures have been decidedly lacklustre – just 0.2% over the last quarter. Despite the claim of exceptional factors – few of which are totally convincing – the economy is close to flat-lining. This trend is hardly surprising as many households seek to rein in their debts after a near decade of over-spending. Moreover, many employees fear the loss of their jobs as the public sector cuts impact more deeply. Hence, economic caution is the order of the day.
Against this background, notwithstanding the deep-seated economic problems in the EU and in the US, modest economic growth should be expected as the excess debt of yesteryear is unwound. In particular, demand for ‘big ticket’ items has been frail. The house-building sector, which plunged on the back of the 2008 financial crisis and the scarcity of mortgages, remains in the doldrums. The UK’s top two electronic retailers – Dixons and Comet (part of KESA) – are both struggling whilst the outlook at Carpetright, a bellwether for the consumer sector, is still grim.
For the Government, persistent low economic growth will make it immeasurably harder to bring about major reductions in public borrowing. Apart from accepting that low economic growth rates may well prevail for some considerable time, what can be done?
First, the Government needs a renewed offensive to cut back public expenditure, which is still growing strongly, especially with the net interest cost climbing remorselessly. The scope for cutting the cost of social security remains vast, whilst other major budgets, including local government – some of which is still living ‘high on the hog’ – and defence procurement present open goals for savings: similar comments are applicable to the protected NHS.
Secondly, whilst bringing public borrowing under control remains paramount, the Government also needs to give a medium-term priority to delivering substantial tax cuts. In summary, the vision of ongoing annual economic growth of 2.5% or more looks very optimistic.