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Blow for Osborne as economy grows by just 0.2 per cent

The Chancellor hails "positive news" but he's missed his growth target again.

The news is out: the economy grew by just 0.2 per cent in the second quarter of this year. George Osborne will be relieved that it's not a negative figure, as some predicted, but it's still unambiguously bad news for the Chancellor. He needed growth of at least 0.8 per cent to stay on track to meet the OBR's growth forecast for this year (1.7 per cent - a figure that has been downgraded three times) and he's fallen well short. With this in mind, it is risible of him to claim that growth of 0.2 per cent is "positive news".

The Office for National Statistics said that "special factors", including the royal wedding, the Japanese tsunami and the unusually warm weather knocked around 0.5 per cent off GDP, which Osborne will cite in his defence. But the reality is that the economy has now grown by just 0.2 per cent over the last nine months, compared with growth of 2.1 per cent over the previous nine (see graph). As a result, the OBR will now be forced to cut its growth forecast for the fourth time since it was founded last May. Against this backdrop, it's hardly surprising, as the Telegraph reports, that "Downing Street aides [have] become increasingly impatient with a lack of growth".

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We can expect Osborne and his allies to blame all manner of things, from the royal wedding (which we were originally told would "boost the economy"), to the eurozone crisis, to global instability. They're right - up to a point - but that doesn't explain why Britain has performed so much worse than many of its competitors, all of whom face the same "global challenges". Germany grew more in Q1 (1.5 per cent) than the UK will in all of this year.

The truth is that Osborne's policies have exacerbated, rather than diminished, Britain's economic problems. His mythical claim that Britain was "on the brink of bankruptcy" had a chilling effect on consumer confidence as families stopped spending in anticipation of the cuts and tax rises to come. His reckless decision to raise VAT to 20 per cent tightened the squeeze and automatically added 1.5 per cent to inflation.

So, to quote Lenin, what is to be done? There is, as I've argued before, a strong a case for a temporary cut in VAT. A VAT cut would boost consumer spending, lower inflation (thus reducing the risk of a premature rate rise), protect retail jobs and increase real wages. When Alistair Darling reduced the tax to 15 per cent during the financial crisis, consumers spent £9bn more than they otherwise would have done. A VAT cut today would be a similarly effective fiscal stimulus. But Osborne and David Cameron have already ruled out such a course of action.

That leaves Vince Cable's call for a "more imaginative" form of quantitative easing - the closest the government has to a plan B. But even another round of QE - the effectiveness of which is doubted by many economists - won't be enough to kick-start the economy. Osborne might have avoided a double dip but an anaemic recovery now looks inevitable.