After a week of spring sunshine in Britain, even gloomy economists like myself may have forgotten just how bad the weather was at the end of last year. But Wednesday’s growth data should be a stark reminder: heavy snow in the UK made the last quarter’s gross domestic product figures look worse than they were (and they were bad). But today’s tiny rise makes these latest figures look better than they are. And they are very bad indeed; arguably even worse than the last quarter.
The figures are stark. The UK economy grew by 0.5 per cent in the first quarter. But this means that over the past six months growth has been exactly zero; Wednesday’s 0.5 per cent rise just cancels out last quarter’s 0.5 per cent fall. And although manufacturing is doing well – and that is welcome – it still contributed only 0.1 per cent to growth in each of the last two quarters.
What does this tell us? On fiscal policy, the message is that we should listen to economists, not credit rating agencies. Most mainstream economists argued that the impact of the government’s fiscal consolidation on confidence and consumer demand would be negative; so it has proved.
Indeed, in a number of respects the government’s fiscal consolidation now looks contractionary. It is frontloaded. It also relies on spending cuts far more than tax increases. Some aspects of it – especially welfare benefit cuts – will hit the poorest particularly hard. And the full impact of these cuts is very much still to come.
Meanwhile, the argument that fiscal overkill was necessary to appease the credit rating agencies has again been disproved by market reaction – or the lack of it – to the Standard & Poor’s outlook warning last week in America, where US Treasury yields hardly budged.
These figures should also put to rest, for the time being at least, the recent mini-panic about inflation. Calls for the Bank of England to raise interest rates must end. At a time when recovery has not been firmly established, there is no case for a rise in rates to respond to temporary or one-off shocks to inflation.
None of this means that the UK does not need a credible fiscal consolidation plan; it does. It also does not mean that interest rates will not have to rise; they will, in time. But in the short term, policy, especially fiscal policy, is too tight. As we saw in the 1980s, that risks long-term damage, both social and economic.
There are many areas where scaling back or delaying the cuts would boost both short-term demand and longer-term growth prospects. A small but important symbolic step would be for the coalition government to follow the advice of the Organisation for Economic Co-operation and Development, and “encourage participation in secondary education by reintroducing the education maintenance allowance”.
Such a move would show that the government took economic evidence and analysis seriously. More importantly, it would demonstrate that it was prepared to prioritise the interests of both poorer British teenagers and the economy as a whole, over a misguided and futile desire to appear “tough” on fiscal policy.
Put simply, the UK is a large country, issuing debt denominated in its own currency. It has very long average debt maturities, and therefore no serious issues over its long-term solvency. Countries such as ours have considerable freedom over fiscal policy in the short to medium term. We should use it.
The writer is director of the National Institute of Economic and Social Research
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