After weeks in which the phone hacking scandal has righty dominated the headlines, the economy will return to the top of the agenda on Tuesday when the GDP figures for the second quarter of this year are released. In an article for PoliticsHome, Ed Balls points out that George Osborne needs growth of at least 0.8 per cent to stay on track for his Budget forecasts, which have already been downgraded three times.
The problem for the Chancellor is that almost no one expects him to achieve this. The government’s own Office for Budget Responsibility is forecasting growth of just 0.4 per cent. The National Institute of Economic and Social Research is even less optimistic, predicting growth of 0.1 per cent. Others, such as Citigroup and Scotia Capital, believe the economy shrunk by around 0.2 per cent in the second quarter. Given that growth has been flat for the last six months, a negative figure would be disastrous for Osborne, sparking inevitable talk of a double-dip recession.
The Chancellor is already preparing his excuses, from the royal wedding to the rising price of oil, to the eurozone crisis, but the true explanation lies closer to home. It was his “age of austerity” rhetoric that led to a dramatic fall in consumer confidence as households and businesses reduced spending in anticipation of the cuts and tax rises to come. Osborne’s reckless decision to raise VAT to 20 per cent tightened the squeeze and added 1.5 per cent to inflation. As a result, Britain, which was at the top end of the European growth league table, is now fourth from bottom, with only Greece, Portugal and Denmark below it. The fall in private spending and the cuts to state spending mean that there is, quite simply, nothing to stimulate growth.
In an article for today’s Sunday Telegraph, Osborne makes another attempt to set out a “growth agenda”, promising to rebalance the economy “towards exports and investment” and to do away with “very high tax rates that only damage growth and enterprise.” But rather than prioritising the abolition of the 50p rate, which affects only the richest 1.5 per cent, Osborne should adopt Balls’s proposal of a temporary cut in VAT. As I’ve pointed out before, 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.
It is no longer acceptable for the government to dismiss its critics as “deficit deniers” and to reject calls for a plan B as premature. Osborne, who once boasted that the “plan is working”, must accept that his is not.