“The plan is working,” George Osborne hubristically declared in November. Since then, he’s had to downgrade his growth forecasts for the third time since taking office. Will he have to do so again? The latest economic survey by the British Chamber of Commerce suggests so.
The BCC is forecasting growth of just 0.6-0.7 per cent in the first quarter, lower than the 0.8 per cent predicted by the Office for Budget Responsibility. As Will Straw points out, this means that the economy may have grown by just 0.1-0.2 per cent in the six months to March. At the Budget, the OBR downgraded its growth forecast for 2011 to 1.7 per cent (down from 2.1 per cent in November, 2.3 per cent following the Emergency Budget and 2.6 per cent in June), but the BCC is predicting growth of just 1.4 per cent for this year.
The BCC’s David Kern says: “I don’t think this is an argument for stopping the cuts, but it is an argument for keeping interest rates low.” Osborne hopes to use loose monetary policy (interest rates and the exchange rate) to offset the effects of a tighter fiscal policy (spending cuts and tax rises).
But this approach works only if interest rates are high to begin with. For instance, following the savage cuts of the 1981 Budget, Geoffrey Howe cut interest rates by 2 percentage points and the economy surged as a result. But when the coalition took office, interest rates were already at an emergency low of 0.5 per cent and have stayed there ever since.
Monetary policy can’t get much looser. In any case, with inflation running at 4.4 per cent, the Bank of England would struggle to make the case for another cut in the base rate. The only sensible response is to “reprofile” or delay some of the cuts. But even for this government, that looks like a U-turn too far.
UPDATE: The OECD predicts that the economy will grow more slowly than that of any other G7 country bar Japan.
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