“Isn’t it the case that it’s his cuts – that are too far and too fast – that are squeezing living standards, undermining consumer confidence and holding back growth in the economy?”
Ed Miliband, 27 April 2011
The background
Wednesday’s bad news on growth quickly turned into a political fight in the Commons, with Labour leader Ed Miliband accusing the Coalition of undermining the recovery with its package of austerity measures.
He told David Cameron: “Six months of no growth is because of his decisions, his chancellor’s decisions and his Government’s decision.”
After a year of being blamed for Britain’s economic woes, Labour are clearly trying to move the debate forward and blame stagnant growth figures on Coalition cuts, rather than the legacy of the previous government.
What do the experts make of that?
The analysis
At Prime Minister’s Questions, David Cameron called figures showing Gross Domestic Product (GDP) growth at 0.5 per cent in the first quarter of this year “good news”.
But as Channel 4 News’s Economics Editor Faisal Islam explains, that slight bounceback simply reverses the decline of 0.5 per cent seen in the final quarter of 2010, which was widely blamed on the heavy snow that slowed many parts of the country to a crawl.
It was with some justification then, that Mr Miliband said the economy had “flatlined over the last six months”. But he singled out the Conservative-led Coalition’s policy of public spending cuts as the culprit.
The only problem, according to economists, is that most of the cuts hadn’t come into effect when the figures on the first three months of 2011 were collected and any impact they have will not show up for some time.
Jonathan Loynes from the research consultancy Capital Economics said: “It’s too early to reach any conclusion about the impact of the cuts themselves because they haven’t really started.
“Government spending only really starts to sink down in the financial year that’s just started. The difference in economic policy in the last three quarters has been minuscule.
“We had this charade in the run-up to the election where both parties were pretending that there was a drastic difference in their financial plans, whereas of course there wasn’t. The change in government has so far had very little effect on the economy. It may come to to have an effect over the next one or two quarters.”
He added: “We have had the VAT hike, which is probably having some kind of effect on consumer spending, but we haven’t seen the bulk of the spending cuts even get going yet.
“With the exception, perhaps, of the VAT rise, it’s not the Government’s policies but the previous government’s policies, simply because of the time lag involved.”
Simon Kirby from the National Institute for Economic and Social Research agrees, saying: “Really the impact on austerity has yet to happen. I think we’ll begin to see it from the second quarter onwards.”
There is an argument that the expectation of cuts has begun to dent consumer confidence, leading to a fall in spending, even though the austerity measures haven’t begun to bit yet, but there’s far from broad agreement about the reliability of consumer confidence indicators.
Tony Dolphin from the Institute of Public Policy Research said: “It’s interesting that consumer confidence did start to fall away in about September, when we had the spending review.
“I think there’s a case to be made about the expectation of austerity. George Osborne went slightly over the top in terms of saying: ‘It’s so bad that we have to have this austerity.’
“All this talk about austerity has knocked confidence and we are now seeing that filtering through to the High Street, with a run of bad results from big high street names.
“It’s not a coincidence that retail sales are flat and GDP is flat as well. George Osborne has made us all a bit more miserable and a bit more cautious and a bit more reluctant to spend.”
He added: “I think it’s a combination of that and things that are out of his power, like rises in food and oil prices. I wouldn’t want to say it’s all George Osborne’s fault because I don’t think it is, but I think he has taken a risk.”
Mr Loynes said he thought rises in global food and oil prices were “much more important” in contributing to the squeeze in living standards than the Chancellor’s decision to raise VAT to 20 per cent in January. Mr Kirby said the VAT hike “would have had some impact on consumer spending – but that was weak anyway”.
He added that Mr Miliband is being “disingenuous” to attack the Coalition’s cuts plan when “we know that a Labour government were intending to cut spending quite dramatically anyway”.
The verdict
There is a broad concensus that Mr Miliband is wrong to point to cuts as the source of Wednesday’s bad news. Most of the austerity measures haven’t come into play yet and there will be a significant time lag before we can say what the direct effect on growth is.
The Labour leader might have had more luck if he’d attacked Mr Osborne’s VAT hike, although it’s far from clear that this is the only reason people appear to be spending less.
All our experts agree on one thing though: a flatlining economy will be poorly placed to withstand the possible negative effects that could become apparent once job losses in the public sector start to take effect.
In the words of Jonathan Loynes: “You would conclude that it’s not looking particularly well positioned to weather these cuts. You would have to be a little bit concerned concerned about how weak it might look once the cuts take effect.”
By Patrick Worrall
