Falling Down

The United Kingdom is still stuck in the biggest and deepest recession on record.

Data from the Office for National Statistics (ONS) have revealed that gross domestic product (GDP) shrank by 0.4 per cent in the third quarter of 2009, confounding analysts’ predictions of an increase of 0.2 per cent.

Now spanning six consecutive quarters – a first since the ONS started compiling GDP figures back in 1955 – the UK is currently experiencing its longest period in recession on record.

The economy has now been contracting since early 2008.

Output fell almost entirely across the board, with the industries of construction, distribution, hotels and catering, transport and storage, and business services and finance all recording a decline.

The Bank of England is however optimistic. Why? Who knows? Maybe the Governor got a bit of a telling off for his last foray in to the political field.

The Bank of England confirms that the UK economy has shrunk by 6% in 18 months. Although it does not use optimistic language its report remains highly optimistic.

This chart shows the Bank of England prediction trend line for economic growth. The Bank sees the economy growing by 2.1 per cent next year, an amazing and unprecedented growth of four per cent in 2011 and an equally implausible 3.5 per cent in 2012.

Growth rates

Even using those highly optimistic growth rates it will take until 2012 for the economy to return to the output levels of 2007/2008.

These assumptions are however weak. They ignore the necessary but painful budget cuts that will have to be made by the Public Sector over the coming years. Taxes are covering only £4 out of £5 being spent by this Government, the rest is borrowing.

Although there will be some reduction in borrowing from growth, that growth will not be enough to get the budget out of deficit.

Indeed, with a growing elderly population, changes made to the Pension Credit scheme, including a pre election boost to pensioners, will only continue adding to the bill.

The Government is already talking of cuts. Ed Balls has offered up £2 billion of cuts in the Education budget.

Tax rises are also going to be harsh. You can not cut £175 billion of spending without a dramatic rethink of the role of the State and that will not happen.

Everybody who lives in the UK will pay more for reduced public services.

This will impact on growth. A smaller pubic sector means less jobs. Increases in tax will hit investment.

Unwinding quantitative easing will not be easy. Yields on UK gilts will rise, which means increases in interest rates. The mini-bubble in parts of the housing market will therefore pop. To me that is probably one of the only good things. It was after all the housing bubble that got us in to this mess. The irony of the Labour years is that through Housing Associations, the Government spent billions on “affordable housing” and then gave billions to the banks to keep houses unaffordable. We need a different direction on housing.

So faced with even more tax rises, where do the jobs come from? Who knows. The UK is now deeply uncompetitive. Income tax rates are too high at too early a level, we should not be taxing those on minimum wage and we should not be treating someone on £35k as a top rate taxpayer. And although other Countries have a higher top rate theirs start at a much higher band.

Corporation tax is far steeper than in most of our competitor nations and the 2007 budget changes to screw over new businesses will not aid recovery. Small businesses have always been the fuel for economic growth.

The UK’s trend rate of growth prior to the recession was 2.75 per cent a year. That keeps the UK economy at below 2007/08 levels until 2015.

By that time almost every other large European economy will have outgrown us. Will Britain still get a seat at the table? Kind of explains why the G5 became the G8 and why it is now the G20.

With at least five years of hard slog to get back to where the economy in 2007, Cameron looks as though he will be picking up more than a poisoned chalice. The chalice itself is poison. It will be him and not Brown who will get the blame for the economic mess that will take a generation to recover. People have short memories and it is easy to blame the ones in power NOW for the damage done by a previous administration. The Republicans are already doing it in America. “New Labour” will start the blame game on day one.

Interesting times ahead.

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