Dangers are showing of double dip recession

The Treasury Select Committee of MPs said that the Budget had caused “a slight increase” in the chance of the UK economy contracting again over the next year or so.

However, in the longer term, the Coalition’s plans to reduce the Government deficit will make it more likely the economy will grow strongly, the committee said.

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The committee’s conclusions came in a report on the Budget, which set out plans to cut nearly £100 billion from public spending and raise taxes including VAT from next year.

George Osborne, the Chancellor, has said that the painful measures are necessary to reduce the Government deficit and reassure international markets about Britain’s ability to repay its debts.

The MPs pointed out that some economists worry that by cutting Government spending so sharply, the Coalition risks withdrawing the economic stimulus too early.

“There is concern that such a consolidation may come too early and cut too deeply, and as such cause the economic recovery to falter, leading to a ‘double dip’ recession.”

The Treasury’s independent forecaster, the Office for Budget Responsibility, reduced its outlook for economic growth following the Budget, predicting the economy will expand by 1.2 per cent this year and 2.3 per cent in 2011.

Before the Budget, the OBR had forecast growth of 1.3 per cent and 2.6 per cent.

The committee, which has a Conservative majority, suggested that the outlook may be bleaker and the economy could actually shrink again. Two quarters of negative growth would constitute a return to full-blown recession.

“It appears that there has been a slight increase in the chance of near-term negative growth and an increased likelihood of positive growth in the outer years,” the MPs found.

In the event that the economic recovery falters, the committee said it expected the Chancellor to postpone his deficit-cutting plans and pour more money into the economy, even if that requires more borrowing.

“The global economic situation is fluid and fragile, and it is possible that the Chancellor may need to alter his current plans to compensate for external events,” the MPs said.

In evidence to the committee, Mr Osborne said that he had built “a degree of caution” into his plans by aiming to balance the budget a year earlier than he believed was strictly necessary.

“We welcome this as a signal that if economic conditions demand it he may be prepared to take measures to stimulate the economy, even if these delay the current plans for cutting the deficit,” the MPs said.

Labour and some Liberal Democrat MPs have criticised the Budget, arguing that its measures will mainly affect poorer people.

Mr Osborne has insisted his measures are “progressive” and will put the greatest burden on wealthier people.

But the MPs said they were “concerned” that when the effects of the Budget are measured as a share of net income “the poorest fare slightly less well than middle-income group”.

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