Monday, June 27, 2011

 

How Much Longer Can George Ignore the Signs?

Larry Elliott today rehearses a by now familiar refrain regarding the inevitability of the Coalition's U turn over deficit reduction. He points out we have seen them over: the sale of forests; reform of the NHS; and reduced sentences for guilty pleas. But it's not just a Guardian columnist saying this.

Paul Johnson, Director of the Institute for Fiscal Studies (IFS) is saying something very similar in the current issue of Prospect. Elliott flags up the recent shocks to the economy: bursting of the private sector bubble; seizing up of the financial sector making it paranoid about lending; and the rapid rise in commodity prices which has fuelled a very unhealthy inflation. With banks and companies seeking to clear up their debts and individuals paying off their mortgages, there is no money left to invest and grow the economy.

So we see a bank rate of 0.5% having little or no effect on house sales- such a rate in theory is tailor made for one- and with consumers saving there is precious little being bought on the High St. Back in May 2010 the economy was still growing as a result off Labour's final bits of stimulation. Next came growth of 0.7 in the third quarter but then growth has been zero ever since with no sign of it recovering.

How much longer can Osborne manage to ignore signs which anyone who had read page one of 'How to Learn Economics' would recognise? The problem is that this is the U turn which dare not speak its name. It would not be called a U turn but would be instantly called one and Cameron's credibility, Osborne's and the Coalition's would be perhaps fatally wounded, leading possibly to the end of the government by this time next year.

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