Thursday 1 September 2011
UK Growth cut suggests Plan C needed
The first pieces of major news though are at least now contradictory. China manufacturing is holding up, Australian business is expanding, US job figures are improving versus Brazil cutting interest rates and the BCC cutting its forecast for UK growth.
There is a real downside to these growth cuts though in the medium term. The UK is still some 2% short of where its economy was in 2008 (pumped on leverage steroids of a mad Government, perhaps this is no bad thing). However, this means that job creation and demand are going to be low for sometime to come.
With growth falling to anemic rates, this process will stretch out years. In fact on new figures it maybe 2013 before we get back to a 2008 size of the economy; this shows what Labour did, bringing forward 5 years of growth into 2005-2008 - and we all will have experienced the cost of that.
However, the situation is creating bigger problems for the current Government too. Firstly, they now need to dismiss the loons like Ed Balls and Adam Pozen who advocate yet more stealing from the future to cure today's ills. They also need to find a path through the challenge of deficit reduction. For as growth falls, so does tax income and therefore so does Government income. To reduce the massive deficit the Government needs to keep revenues high or to cut faster. If it was really bold, it would cut taxes and cut further into its bloated programmes.
Unfortunately this is beyond the comprehension of the media or a docile public who have been brought up to believe that the state is their carer and salvation. This is Plan C - further cuts, tax cuts and growth ignition in the private sector by showing the Government is serious - there are massive amounts on Corporate and Investments funds sat in the money markets waiting for a leader to show them it is safe to come back and invest- can Cameron be that leader?
Each .5% fall in GDP will likely lead to a 1% increase in the predicted deficit. It makes it hard to see how on the current course the spending deficit will be wiped out by 2015 - meanwhile gross debt is 148% of GDP and still slowly rising.