UK in recession: more cuts to come?

News that the UK has re-entered recession, based on a lack of activity in the construction sector, could lump misery on millions of Britons struggling with cuts to benefits, rising taxes and soaring fuel costs.

George Osborne has received a poor press for last month’s budget, with controversy over charitable donations, the tax on Cornish pasties, the so-called “granny tax” and the decision to cut the top rate of income tax to 45 per cent.

And it could get even worse as the recession is set to see higher unemployment and lower taxes collected by the Treasury.

‘More cuts to come’

Vicky Redwood, economist at Capital Economics, told Channel 4 News: “We think the economy will stagnate, and may even contract further this year. We think there will be more cuts to come – real pay is not rising and we don’t expect it to until next year.

“A lot depends on how the Office for Budget Responsibility acts – if it decides that the underlying performance of the economy is weak, then it will mean more austerity measures.

“We believe the chancellor will extend the cuts beyond the 2014 deadline and into the 2015 budget – extending the period will be inevitable.”

But how does the UK get out of the current financial crisis?

“We would like to see more quantative easing – pumping cash into the economy – and the government should also invest money into the public sector.

“It will need to borrow money to do this, but I think the stock markets will look on this favourably, as it is an investment to help growth, rather than for day-to-day spending.”

Figures ‘an estimate’

But the latest figures on growth may be a slight blip rather than the road to more cuts, according to Chris Williamson, chief economist at Markit.

He told Channel 4 News: “I don’t think these figures paint the true picture – there was very little data from March, when we knew that the construction sector had a very good month because the weather was so good and there was lots of building.

“The figures are only an estimate – the Bank of England has discounted them.

“We are aware that the austerity measures are hampering growth, but the government is on target to meet its target to reduce the deficit this year, but it is going to be a really tough call.”

Elsewhere, there were more gloomy predictions for businesses.

“It is clearly not good news, the missing link in the economy has been confidence,” said Graeme Leach, chief economist at the Institute of Directors.

He told Channel 4 News: “These are relatively small falls, so we shouldn’t be too alarmist. But regardless of the figures, it is the message that comes out to business – to be cautious – exactly when we want them to be a little more aggressive in terms of recruitment and investment.”

However, some pointed to other recent business surveys, which painted a more positive picture of the economy.

“These figures are at odds with the experiences of many UK businesses, which continue to operate with guarded optimism,” said David Kern, chief economist at the British Chambers of Commerce.

He added that the estimated figure to be revised upwards when more information became available.