UK Economy: Where to next?

What a fine mess we have got ourselves into. Today, Britain became the latest country to return to recession after figures revealed that the British economy shrunk by 0.2% between January and March this year. After months of commentary asking whether Britain would face a double-dip recession, the Chancellor George Osborne will now face a brutal bombardment to whether his plans are working.

The belief in the Treasury was that growth would not be easy to come by, the independent Office for Budget Responsibility (OBR) forecast growth at 0.8 per cent in 2012 and 2.1 per cent in 2013. The original figures were far more hopeful.

The admission that the target to wipe out the budget deficit within this Parliament would not be fulfilled only made the Chancellor and his Treasury team more resolute. Whilst America has seen a healthy return to growth, Britain has been undermined by the uncertainty caused by the debt crisis within the Euro zone. The bite of austerity would continue for at least another two years into the next Parliament.

Ironically, as these harsher conditions have ensued, the government debt is actually increasing. The loss in tax revenues has meant the Coalition will increase national debt to around £1.4 trillion by the end of this Parliament. So whilst the budget deficit may eventually be eradicated, there will still be a long term national debt burden for future generations to deal with. Economists are still uncertain of the long term effects of low interest rates combined with tranches of quantitative easing.

So was the Labour shadow chancellor Ed Balls correct? Was the coalition government cutting ‘too far and too fast’? It appears now that the coalition’s strategy is running at the same timescale as former Labour chancellor Alastair Darling expected it to before the last general election. According to Mr Balls the coalition has made the cuts but created no growth.

However, despite the poor headlines for the Chancellor in recent weeks, it is unlikely to shake him and his Liberal Democrat partners. Mr Balls has been vociferous, yet despite his so-called ‘five point plan’ he is yet to suggest anything of substance. The double-dip may actually force pressure on the Labour treasury team to announce some of their ideas, a stage which may get them caught out.

The previous set of employment figures showed that for the first times there were more jobs created in the private sector than lost in the public sector, a trend that Mr Osborne can only hope to continue. Today’s figures if anything are more likely to make the Chancellor ignore calls from the opposite benches and look towards greater market reforms from the right. As chief strategist of the Conservative party, be certain it will not be something he is willing to get wrong.