UK coalition consider economic U-turn as IMF warns of double dip recession

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by a Newsnet reporter

The UK government are reportedly considering a change of economic direction after a warning from the IMF that a double dip recession is a possibility.  Chief Secretary to the Treasury Danny Alexander recently ruled out such a move on the grounds that it would be damaging to his department’s credibility.

The IMF also cut its growth forecast for the UK economy from 1.5% to 1.1% and advised Conservative Chancellor George Osborne that he should revise his plans to put deficit reduction ahead of all other considerations if the economic outlook continued to deteriorate.

In order to avert the possibility of a recession, Coalition cabinet ministers are reported to be holding discussions on how to inject a £5bn boost of capital spending into the UK’s struggling economy while maintaining their goal of reducing the UK’s mounting deficit.  Opposition parties have consistently called for an increase in the amount spent on capital projects like transport infrastructure and broadband as a means of increasing the efficiency and competitiveness of the UK economy and creating jobs.

According to the IMF the UK is one of the big three economies at serious risk of a ‘double dip’ recession, with a 17% chance that the UK economy would fall into recession in the coming year.  Assuming this can be avoided, the IMF calculates that the UK economy ought to grow by just 1.1%, a weaker performance than in 2010.  This figure is a reduction from the 1.5% growth figure forecast by the IMF this June, and substantially lower than the 1.7% growth figure forecast by Mr Osborne when he delivered his budget speech to Westminster in March.

The current discussions within the Cabinet on how to increase funding on capital projects like transport infrastructure represent a significant U-turn for the government.  The Treasury has previously stated that its over-riding objective was the reduction of the budget deficit, and maintained that any change in strategy risked its credibility.

Chief Secretary to the Treasury Danny Alexander insisted to the BBC that the government remained focused on its objective of eliminating the deficit within the lifetime of the Parliament saying:  “We are straining every sinew to find new things that government can do to support growth, to help private sector businesses to lead the economic recovery.

“But of course a key part of that is to retain the credibility that we’ve built up as a country by sticking to the deficit reduction plan that this coalition put in place when we first came into office.”

The SNP and Labour have said that the government must take heed of the IMF warning.  Ed Balls, Labour’s shadow chancellor said:  “Our chancellor and political leaders in Europe need to wake up to the scale of the problem and finally realise that we need economic growth and more people in work to really get deficits down.”

Meanwhile the SNP’s Westminster Treasury spokesman Stuart Hosie pointed out that the Scottish government, within the financial constraints set upon it by Westminster, was taking precisely the steps identified by the IMF to forestall recession by increasing capital expenditure, improving access to finance for medium and small sized businesses, and introducing measures to boost consumer confidence and promote economic security.  

Scotland is the only part of the UK where unemployment fell in the quarter May-July 2011.  During this period Scottish unemployment fell by 3,000 to 7.5% whereas the UK saw an increase in unemployment of 80,000, taking its figure to 7.9%.  Over the year, Scottish unemployment has fallen by 33,000 compared to a UK wide increase in unemployment of 44,000.  

Mr Hosie said:  “The time has come for the Treasury to take action and follow the Scottish Government’s lead by implementing an economic ‘Plan MacB’ to build recovery and growth.

“The SNP Government are delivering a ‘Plan MacB’, which is cutting unemployment in Scotland while it rises in every other part of the UK, and it is vital that the Tory Lib Dem coalition at Westminster follows the Scottish lead – otherwise there is a real risk that they will derail our recovery.

“Measures are needed to boost consumer confidence, especially critical to recovery at a time of inflation, fuel and food price pressures.  We need to see a new focus on additional infrastructure investment, such as new transport and housing projects, to create new jobs and new capital assets for the long-term.  And we also need the UK government to take action to ensure the banks improve access to finance to help good businesses grow.

“Our no compulsory redundancy policy for staff under Scottish Government responsibility is helping to boost consumer confidence, and our commitment to the social wage – including the council tax freeze, no tuition fees, free prescriptions, and free concessionary travel – is giving Scots households maximum protection at a time when other bills and inflation are on a sharply rising curve.

“We now need the UK government to follow this lead and introduce an action ‘Plan MacB’ to drive recovery.”