26 Jan 2011

What is the Plan B for the UK economy?

David Cameron insists he won’t change course on the UK economy despite a shock contraction but do we need a “Plan B” to boost growth? Cathy Newman reports as two economists debate for Channel 4 News.

What is best plan for UK economy? (Reuters)

The economy might be in reverse but David Cameron has insisted he won’t change course, clashing with the Labour leader Ed Miliband in the Commons. Mr Cameron said it would be wrong to ditch policies based on one quarter’s figures – echoing Mrs Thatcher’s old rallying cry – there is no alternative.

Mike Wickens, Professor of Economics at the University of York and advisor to the International Monetary Fund
Before interpreting the latest estimate that growth fell by 0.5 per cent last quarter, it is important to realise that within two months such estimates are revised (usually upwards) by between 1 per cent and 3 per cent, so we could be talking about the sign of the measurement error last quarter, let alone the exceptional effects of the weather which have caused construction to fall the most. I would therefore be surprised if eventually we did not find that growth had increased.

The broad thrust of recent GDP data is that after six quarters of negative growth we have had four of positive growth. This is typical for a business cycle; it is not common to have a double-dip recession. The question of most interest is whether Government public expenditure cuts have been so large that they have caused one. Although a strong supporter of fiscal retrenchment, I concede that this is possible.

I would therefore be surprised if eventually we did not find that growth had increased. Professor Mike Wickens

Normally, a recession is not preceded by a large structural fiscal deficit due to burgeoning expenditures and so cuts are not necessary. This time was different. Restructuring long-term public expenditures and quickly, was necessary as the world-wide credibility derived has shown. Given the cuts mainly affect public employment, it is not surprising that unemployment has risen in the short run. The longer term aim is to release labour for private sector growth. It is therefore most encouraging that the current data show that exceptionally manufacturing has grown.

To support the economy, the Government has not cut expenditures associated with the business cycle and it has given approval to the Bank’s failure to control inflation.

What's the solution to get the UK economy out of the doldrums? (Getty)

David Blanchflower, Professor of Economics at Dartmouth College and former member of the MPC

The UK economy is slowing fast and the Government’s policies are clearly not working. It looks like we are headed into a double dip because there is every likelihood that growth will also be negative in the first quarter of 2011.

Labour’s policies were working as improving public finances and growth of 1.1 per cent in the second quarter showed. But that is now long gone. Osborne and Alexander have no policy for growth as Sir Richard Lambert of the CBI made clear this week.

Was it the weather wot done it? Channel 4 News FactCheck

The economy slowed by 0.5 per cent in part because of the weather but that is not the whole story as George Osborne tried to claim. The survey data for several months has been predicting a slowdown especially in services and construction.

The Tory-led Government’s policies are clearly not working. It looks like we are headed into a double dip. Professor David Blanchflower

It is also clear that the Coalition has talked the economy down even before the reckless spending cuts and VAT increase take effect. Unemployment is rising and house prices are falling. Youth unemployment is close to the million mark.

This Government’s economic policies are in disarray. It is time to reverse course and stimulate the economy rather than destroying it. Thank goodness Ed Balls is on the case.