Forget phone hacking ? if tomorrow's growth figures are dire, the coalition really will be fighting for its life
On Monday, George Osborne will be told what we will all learn on Tuesday: the second quarter growth figures. Throw a dismally small number into the air, add a zero and a decimal point and your guess will land near the result. Ministers will be relieved by any outcome without a minus attached. The word doing the rounds inside government to describe the economy ? "choppy" ? barely suffices. Britain is not just facing whitecaps in the Solent. Howling Southern Ocean gale is more like it.
A year ago, in the same quarter, the British economy grew by 1.2%. This time it might only manage 0.2%, or nothing, on top of feeble quarters before. The thing new intake Tory MPs joked about as they packed up their offices for the summer was not some further disaster over hacking, but the possibility of being recalled to parliament in August to deal with the implosion of the eurozone and the British economy with it. Thursday's quick fix in Brussels may bring only short-term relief.
Everything else, more or less, is survivable: but the coalition could not outlast a collapse of confidence in its economic plans. And with Monday's figures confidence will be shaken again. Climbing food and fuel prices, a domestic recovery made of jelly, a eurozone bond market prone to bouts of nervous collapse, a cooling-off of Asian growth and a US political system maniacally intent on blowing up the dollar are the worst companions to the government's bitter programme of tax rises and spending cuts.
The paradox is that the nastier things get, the more those in charge will be persuaded to stick to their course. There really isn't a plan B, only an infinity of variations on plan A, which is to spend less and tax more in the expectation that at some point the economy will grow and in the meantime the bond markets will decide to kill some other unfortunate country rather than Britain. The re-eruption of Europe's debt crisis only reinforces the determination. The miracle, ministers are fond of repeating, is that Britain is running a Greek-style deficit with German interest rates. "That's a huge actual success by George [Osborne] combined with a complete failure to communicate," adds one.
That point about Greece is only half-true. Last year's Greek deficit was 10.5%, compared with 10.2% in Britain, but our total debt pile is half as big as a share of GDP and Britain at least has a convincing plan for getting the deficit down that allows it to keep on borrowing cheaply. Labour will assault the government today for wobbling off course ? on borrowing, higher than planned, as well as on the absence of recovery. It will connect those two things to say that if the government spent more now it would have to borrow less in the end.
But borrowing in search of an instant sugar rush of feelgood growth would be at best a gamble and at worst, in current bond market conditions, suicide. "Only one plan has any chance of choppy growth rather than totally disastrous decline," says a minister close to Cameron, and I think he is right.
This, however, leaves the government trying to sell a tricky counterfactual message: "things are horrible, and worse than we warned, but they would be even nastier if we did anything else". Maybe the eurozone crisis will persuade the public that cuts are justified by real fears and real overspending. But in bleak times, when living standards have been static or falling for five years and when real disposable income has dropped by 0.8% in the last quarter, a promise of bread and water today to be followed by gruel tomorrow is going to be a tough sell.
If the world economy holds, Britain will return to lukewarm growth. Last week the Ernst & Young ITEM club cut its forecast for 2011 and 2012, though it predicts 2.7% growth by 2014: nicely timed for an election. But it's not much, it's not certain and anyway it's no comfort now. So it is important the government responds.
How? Certainly not Ed Balls' barely extant McGrowth plan to cut taxes and increase spending at the killing cost of higher long-term interest rates. There's no possibility of walking away from cuts ? the bulk of which, as it is becoming boring to repeat, Labour also committed itself to before the election and which, severe though they are, still increase spending in cash terms over the parliament.
The problem is that Osborne's plan was drawn up before Britain fell into the grip of what one minister admits is "a classic monetary squeeze". Everyone is too afraid, or too hard-pressed, to spend or borrow or save. Balls is not wrong about the need to drag the economy from its slough of despond.
So something must be done. And seen to be done. But what, if not a big fiscal stimulus? Calling for a growth strategy is not in itself a growth strategy. The so-called automatic stabilisers ? such as welfare payments ? will inject some money into the economy if the situation worsens. The chancellor's target is to balance the budget in structural terms a year earlier than he says he needs to. So some slippage is possible: call it plan A+, if you like.
Immense suggestive pressure is simultaneously being put by ministers on the monetary policy committee to resume some form of quantative easing. Might this, though, not spook the same committee into raising interest rates, under its legal duty to restrict inflation?
To a government betting everything on monetary rather than fiscal rescue, a premature interest rate rise would be catastrophic (even if real rates are already above the official level and loans hard to find). For the long term, ministers are plugging away at supply-side reforms. Regulations are being cut in 24 areas ? but slowly: the first announcement, on retail, is only coming this week. The growth plan, such as it is, comes in 1,000 fragments: everything from planning to transport investment. But as well as being hard to promote, supply side reform makes a difference over decades not months. It's no help in this crisis.
Pain today, pain tomorrow and maybe pain for a very long time. There's a reason Cameron seemed sanguine about phone hacking. Inside government there's a much, much bigger worry. Phone hacking won't sink him. The economy could.
Consumer spending Allen Stanford Consumer affairs Roy Hodgson Mergers and acquisitions Banking
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