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26 June 2010

Ken Clarke warns: double-dip recession “still possible”

Former Chancellor says that early spending cuts may tip economy back into recession.

By George Eaton

Ken Clarke has become the first cabinet minister to warn that Britain could fall back into recession as a result of the dramatic spending cuts and tax rises announced in George Osborne’s emergency Budget.

In an appearance on BBC Radio 4’s Any Questions, the Justice Secretary said that a double-dip recession was “quite possible still” and that no one could be sure of the effect Osborne’s policies would have on growth.

“If we didn’t do it (deficit reduction), my judgement is that interest rates would soar and if you want to stop recovery, if you want to make double-dip recession certain, and it’s quite possible still, let British interest rates go up,” he said.

He added: “My hope and my forecast is that we won’t, but no one’s sure.”

As Chancellor during the last major period of fiscal retrenchment, Clarke’s words carry weight in the Conservative Party and in the City of London and will increase market uncertainty.

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His comments came as divisions between the US and Europe over economic policy burst into the open at the G20 summit in Toronto.

President Obama has warned of the dangers of a double-dip recession if all countries start to cut spending at once but leading European economies, especially Germany, are accelerating the pace of deficit reduction.

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David Cameron insisted that he was not at odds with Obama over the timing and pace of spending cuts.

“The risk to us – which the Americans and others recognise – is not taking action,” Cameron said. “I think that the G8 will conclude that those countries with the worst problems need to accelerate their actions, which is what we have done.”

In an open letter to G20 leaders last week, Obama warned that cutting spending too quickly could “result in renewed economic hardship and recession”.

As a result of the measures announced by Osborne in Tuesday’s Budget, the Office for Budget Responsibility downgraded its growth forecast for this year from 1.3 per cent to 1.2 per cent.

But economists including David Blanchflower, a former member of the Bank of England’s monetary policy committee, and Robert Skidelsky, the author of a three-volume biography of John Maynard Keynes, have warned that withdrawing fiscal stimulus, at a time when the private sector remains depressed, could tip the economy back into recession.

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