Just over six months into the Coalition Government – much disliked in the Westminster village but more popular outside it – some welcome economic stability has been achieved.
The 10-year gilt yield – currently at 3.6% - is well down on the figure at the May General Election. And, in the meantime, the eurozone has had a torrid time. But 2011 will be challenging for the UK economy – to achieve a 2% growth rate next year will not be easy. In particular, the decision to raise VAT to 20% is bound to impact retail sales. Furthermore, the disarray in the eurozone will hit exports. High job losses - many directly due to the Comprehensive Spending Review (CSR) - will also hold back retail sales.
Undoubtedly, the Christmas ‘like-for-like’ trading figures of the major retail chains will be carefully scrutinised. Many, especially outside the food sector, are expected to report lacklustre sales – a scenario that is unlikely to improve in early 2011. All this negative news would slow down the Government’s efforts, through the CSR, to reduce Public Sector Net Debt (PSND). The latest cost-cutting initiative hits straight at local government through a substantially reduced level of grant – a policy that should be unequivocably applauded.
For decades, much of local government and many public bodies have been desperately inefficient – the scope for savings is formidable. Salaries, too, at the highest levels need to be cut sharply.
The Government will also be disappointed that bank shares remain weak. Having ‘invested’ a quite staggering £45.5 billion in Royal Bank of Scotland - for whose unparalleled plight no-one is apparently being held accountable – it is unlikely that any substantial sell-down of the Government’s 83% stake will be feasible in 2011. Currently, the ‘investment’ is over £8 billion ‘underwater.’
2011 will be very testing. Is the Coalition strong enough to hold its nerve?