Things can only get worse in a double dip

Columnist and chief leader writer

Thursday 26 April 2012

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Anne Johnstone

So I used to think that double D and triple A were bra sizes. I'm willing to bet the same applied to George Osborne, as he and I have the same degree (scary thought), and it ain't in economics. But we're older and supposedly wiser now, so we know that two consecutive quarters of contraction in the British economy mean we're in a double-dip recession, a prospect the Chancellor arrogantly dismissed less than a year ago. It's the first double D since the stagflation of the mid-1970s and it could put our triple A credit rating at risk.

For the person in the street, yesterday's "growth" figures are irrelevant. An economy shrinking at a fraction of 1% feels no different to one growing at the same rate to the lone parent who has applied for 100 jobs, the graduate who can only get bar work, the civil servant about to lose her job or the pensioner who has seen his income from savings shrivel. They can't spend what they don't have. They know the UK economy is bumping along the bottom. They won't be surprised to hear this is the most sluggish recovery in 100 years or that of the G7 economies only Italy is doing worse. Output is still 4% below 2008 and living standards are still falling.Faced with the most conclusive proof yet that austerity is self-defeating, what does the Government do? Repeat its four old mantras like a scratched record. One: in 2010 Britain faced a bigger debt crisis than Greece, Spain and Portugal. Two: these figures are the fault of Labour and the eurozone. Three: if we abandon the deficit reduction programme, our AAA rating is at risk. Four: there is no alternative to staying the course. All are untrue.Britain did not face a sovereign debt crisis in 2010 because sterling gave us the flexibility to devalue and our debt was structured very differently. The effect of pressing the panic button was simply to empty confidence from the economy faster than a vampire sucks blood from a victim. As for it all being Labour's fault, the economy was growing well when Labour left office and unemployment was falling. Besides, after two years, "It's all naughty Labour's fault" is wearing thin. The Treasury suggested yesterday, is it a knock-on effect of the eurozone crisis. Yes, exports to Europe are down but this is balanced by increases to the rest of the world. The first quarter figures were wrecked by a dip in construction, which has nothing to do with Europe. They are the direct result of the 25% cut in public sector capital investment. In Scotland there's a double dose of pain because the SNP opted to postpone the cuts in 2010. As for Britain's credit rating, here's a cue for ironic laughter. Mr Osborne's entire economic strategy is predicated on remaining a member of the elite AAA club. Now it may turn out that there was a bigger risk to the rating by cutting too quickly than too slowly because the lack of growth is going to make it harder to hit deficit reduction targets. And that could well result in a downgrade. Moody's and Fitch have already put the UK triple A on negative outlook. Meanwhile receipts from income tax, VAT and corporation tax are all down year on year. With the bulk of public sector job losses still to come and new jobs mostly low-paid and part-time, things can only get worse in the short term.To do nothing in these circumstances would be like going to the doc with a growing cancerous tumour and being told there's nothing to worry about. The buoyant economy in the US, which has largely avoided deficit reduction and concentrated on growth and job creation, suggests a Keynesian approach is the right one. I would go further than the rather limp "not so far, not so fast" approach to deficit reduction from Labour. Take a look at the recipe from Neal Lawson of Compass, the left-leaning pressure group. He would not only reverse the current cuts until the economy is growing well but use quantitative easing to insulate buildings, increase benefits to the poorest (who are most likely to spend it), impose a Robin Hood tax on financial transactions and close the £70 billion lost tax gap. Give that man a red dispatch case.

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Things can only get worse in a double dip

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