Osborne will blame the world economy. But the UK was already faltering
The world economy is now obviously slowing. The past few weeks have seen not only extreme turbulence in the global financial markets but also a slew of bad economic data, from EU growth to US manufacturing.
Private forecasters are revising down their growth projections heavily and there is even talk that the Eurozone and US economies might already be shrinking.
George Osborne has responded by hailing Britain as a ‘safe haven’ on the basis that the interest rate charged on government debt has fallen to a record low. To Osborne this apparently represents a vote of confidence from the markets in his deficit reduction agenda.
But there is another, more likely interpretation. This is that the yield on government bonds (the interest rate charged) has fallen not because investors are filled with confidence about Britain, but because they are terrified to hold anything other then government debt. If this is correct that rather than cracking open the champagne, the Treasury should be deeply concerned.
While the Government cannot fairly be blamed for the slowing US and Eurozone economies, it is perfectly valid to point out that its own agenda of rapidly slashing spending is likely to make the downturn in the UK more, not less, severe.
In the coming weeks and months George Osborne will point to events overseas and use this to excuse the UK’s own faltering prospects. He should not be allowed to get away with this.
This has happened not because of events abroad (in fact the outlook for exports has been revised up) – but because of problems with the domestic economy. Back in January independent forecasters believed that domestic demand (the sum total of consumer, business and government spending in the UK economy) would contribute 1.5% to UK GDP (national income) growth in 2011. As of last month they had revised this down to just 0.1%.
The world economy looks to be in trouble and this will undoubtedly hit the UK. But in the past nine months the UK economy has only grown 0.2% – the blame for that lies with the government.
Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone.
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