Lots of pain for no gain

With the economy still contracting and unemployment and inflation on the rise, the coalition government’s determination to cut the deficit at all costs is deeply misguided, says Ed Balls.

This should be the year when the British economy grows strongly and the recovery is secured. When Labour left office last spring the economy was strengthening with growth of 1.1 per cent in the second quarter of 2010. Inflation was lower and unemployment was falling.

And because we got the economy moving again and had fewer people out of work, the deficit was coming down – borrowing in 2009/10 actually turned out to be over £20bn lower than forecast.

These are the facts George Osborne should be reflecting on as he prepares his second Budget later this month. Of course, the last Labour government didn’t get everything right – we should have ignored Conservative calls for deregulation and had tougher controls on the banks. But the decisions we made to support the economy and keep people in their jobs meant Britain was starting to grow again after the global financial crash.

This was all before the new Conservative-led government decided to change course. They abandoned our plan to halve the deficit steadily over four years in favour of a reckless plan – driven by a political rather than economic timetable – to cut the deficit faster than any other major economy in the world.

As we start to see the first signs of these reckless decisions, the evidence suggests things have taken a turn for the worse. At the start of 2011 Britain’s economy faces the worst of all worlds with unemployment and inflation both now rising, growth stalled and consumer confidence collapsed. Families and businesses are already feeling the squeeze from the government’s hike in VAT, higher fuelcosts and frozen wages – while the government gives the banks a tax cut compared to last year. And my fear is that the economy is set to underperform as the full impact of tax rises and deep spending cuts hits the fragile economy this year and holds back the recovery.

The government’s latest forecast that the economy will grow by 2.1 per cent this year – already downgraded twice by the Office of Budget Responsibility, following the emergency Budget in June and again after the spending review – is looking pretty optimistic. As a growing number of economists are now saying, the government is cutting too far and too fast.

Despite the growing evidence that Plan A isn’t working, George Osborne insists there is no alternative to this austerity. But there is another way. We should put jobs and growth first, because getting the economy moving again and more people in work paying their taxes is – alongside sensible savings – the best way to get the deficit down. This is what President Obama’s government is doing in America, and its economy grew at the end of last year while ours shrank – even though they had snow blizzards like us. Greece and Portugal are the only other EU countries who saw their economy contract in the final quarter of 2010.

That’s why I say the chancellor should listen to the advice of the outgoing head of the CBI and start putting the economics before the politics and get a Plan B that puts jobs and growth first. He should start by heeding Labour’s call to repeat last year’s £3.5bn bank bonus tax – and use that money to help create the jobs and growth we badly need this year.

George Osborne seems to be in denial, but he should act now before it’s too late. If the economy does not grow strongly this year – and make up the ground we lost at the end of 2010 – the chancellor will have failed his first major test. And I’m afraid he’ll only have himself to blame.

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