Magazine article Public Finance

Recovery Position?

Magazine article Public Finance

Recovery Position?

Article excerpt

It is not all gloom and doom. Sometimes in 10 Downing Street, late at night - or, more likely, given the prime minister's sleeping habits, early in the morning - Gordon Brown and his close allies talk about a way out of their current troubles. And, very quietly, some even whisper that Labour might still be able to end up ahead of the Tories at the next general election. All this might just be to raise their spirits ahead of this week's party conference in Manchester. But an optimistic scenario does exist in the Brown inner circle.

However improbable it now seems, such a recovery plan should not be thsmissed out of hand. It is the strategy, if it can be so called, by which Number 10, if not the whole government, wants to be judged, and by which Brown hopes to rescue his premiership. Yet the question marks about its feasibility are as much political as economic. Has Brown the will, authority and clarity to see it through?

At its heart, of course, is the economy. Without at least the signs of a pick-up, Brown and Labour have no chance at all of remaining in office.

The Brown strategy at present is twofold: first, to alleviate the immediate worries of people, especially over the housing market and rising fuel prices; and, second, to argue that the British economy is better placed to withstand a downturn than many of its competitors and, indeed, than it was in the early 1980s and 1990s.

Brown claims this is because of a combination of Bank of England independence and control over interest rates; a flexible labour market sustaining employment; strong productivity growth in manufacturing; low public debt, at least relatively; and a willingness to take long-term decisions on areas such as nuclear energy, Crossrail, digital technology and streamlining the planning system to boost competitiveness.

As a result, he said: 'Once we are through this global crisis, we will continue to enjoy the opportunities that the global economy offers to us.'

This reassuring message was, of course, blurred by Alistair Darling's candid interview in the Guardian at the end of last month, when he said that economic times were arguably the worst for 60 years and the downturn could be 'more profound and long-lasting than people thought'. That warning has been borne out by an inflation rate double the Bank of England's target falling house prices and rising repossessions; and predictions of a flat economy in the second half of this year.

The Organisation for Economic Co-operation and Development has forecast that the British economy will grow by just 1.2% overall this year, with all the expansion having already occurred. This compares with its projection of 1.8% only two months ago, and the 1.4% forecast by the International Monetary Fund in August. These forecasts are much gloomier than the Treasury's assessment in the March Budget and will mean a very sharp rise in public borrowing and overall debt

Yet for all the current pessimism, a recession as deep as the two previous ones looks unlikely. The inflation outlook is not nearly as bad as in, say, 1980, when the annual rate of growth of retail prices exceeded 20%, or in 1990, when it was almost 10%. Retail price inflation has fallen to 4.8% and the official consumer price index is slightly less than that Both are still unpredictable but not even the greatest pessimist believes that they will go into, or even approach, double figures. The Bank of England's quarterly Inflation report has suggested that the rate will peak over the next few months, then start coming down again towards the official target The oil price has already fallen by well over a quarter from its summer peak of $147 a barrel. This does not mean that we are returning to an era of low energy costs, far from it, but the sharp upward pressures this year might not be repeated.

This is why interest rates are much lower than at the start of previous recessions. Rates have risen, and might be slow to come down until inflation does, but they are much lower than in the past

However, a lot could go wrong. …

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