Tax hikes and spending cuts likely
Updated on 26 January 2010
An end to the longest UK recession since records began is unlikely to be greeted with the popping of champagne corks at the Treasury.
The sluggish pace of growth likely until the UK picks up steam means little chance of an overnight transformation in the country's prospects.
And a severe round of spending cuts and potential tax hikes looms after the general election as the next Government moves to put the over-stretched public finances back on track.
"Whatever the election result, a very large fiscal squeeze is coming.... the pips are going to squeak like they have rarely squeaked before," said Jonathan Loynes of Capital Economics.
As the economy moves from life-support to a lengthy convalescence, the Bank of England could also raise interest rates from record lows later this year, putting more pressure on household finances.
Governor Mervyn King warned last week that the patience of UK households will be "sorely tried" over the next couple of years due to a short-term inflation spike caused by higher petrol prices and rising VAT.
Rate hikes come even sooner than expected if inflation expectations - closely monitored by the Bank's policymakers - begin to rise.
But the current economic slack left by a recession which cost around 6% of the UK's national output means there is little scope for any meaningful pay rises.
Labour market data showed average earnings growth in the private sector flat year-on-year in November, although the 4% growth enjoyed by the public sector is certain to be pared back as belt-tightening gets under way.
At the same time the UK has seen a sharp jump in household saving rates, which reached an 11-year high of 8.6% during the third quarter of the year as families looked to build up a buffer against recession.
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