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The snow has thawed – but the next round of cuts will freeze the economy

Osborne tries to stay warmYesterday’s GDP figures were a disaster, a disaster that brings home the dangers of cutting too hard and too fast.

The headline figure showed national output (GDP) falling by 0.5% in the last quarter of 2010. The underlying data showed every sector except manufacturing contracting.

With the VAT rise having now come into effect and the major cuts in public spending due to start in ten weeks time, there is a real risk that the Government’s approach to reducing the deficit, combined with its lack of a growth plan (as noted by the outgoing head of the CBI), will become self-defeating.

Yesterday the Government made three arguments as to why it should maintain its current course: the poor figures were a blip caused by the snow, the cuts haven’t really started yet anyway, and manufacturing is doing well. All three can be challenged.

While the exact impact of the snow is hard to quantify, the Office for National Statistics estimates that it was responsible for subtracting 0.5% from GDP. In other words, in the absence of snow, GDP would have been flat. Flat before the real pain of austerity begins in 2011.

The Government will hope that some of the demand affected by the snow was merely delayed and not cancelled – in other words poor figures for the last quarter of 2010 means better figures for the next quarter. Usually this would be true but two factors might scupper this: this month’s VAT rise, and the hit to business and consumer confidence following this bad news. In other words some of the output “delayed” due to the snow might be permanently lost.

The argument that the cuts haven’t yet started is especially disingenuous. In May last year George Osborne and David Laws announced £6.2 billion pounds of “in-year cuts” including Building Schools for the Future, the Future Jobs Fund and the Child Trust Fund. The cuts have started, even if they weren’t entirely responsible for this fall in GDP. Even on their own terms this is a very suspect argument for ministers to make – do they really want to argue that GDP was falling event before they began to cut?

Finally the government has pointed to strong performance from manufacturers, the sector most exposed to stronger foreign demand and best able to benefit from weak sterling. While manufacturing is doing well, services are doing badly. To see what this means for the UK economy, take a look at table 6 of the latest Labour Market Statistics (pdf). Manufacturing employs 2.5 million people while the service sector employs 25.4 million. Manufacturing can not carry the economy, in terms of growth or employment, on its own.

We entered 2011 with falling GDP, rising inflation and increasing unemployment. The Government has no plan for growth – and the economy is in no shape to cope with the coming cuts.

Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone.

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