Saturday, April 25, 2009

Reasons to be cheerless

I mentioned the unrealistic growth expectations built into Alistair Darling's budget the other day, but no one expected these to be so rapidly and comprehensively mocked by reality within a matter of days. But so much for reality. Yesterday's report that the Brtish economy shrank by 1.9% in the first quarter of 2009, the fastest rate of contraction since 1979 has produced a stunningly inept response from Darling, to the effect that he holds form to his prediction of a 3.5% contraction throughout this year followed by a recovery next year. The Left Banker points out that the UK economy is actually on course to contract by 6% over this year and enter into technical depression next year. The basis of Darling's optimism, however, is that the government has "put a lot of money and a lot of support into the economy fiscally, in terms of lower interest rates and credit easing. We have underpinned the banking system." The trouble is that this very strategy of underpinning the banking and credit system in part depends on the government's insanely optimistic growth predictions. As Paul Mason points out, if investors don't believe the government's predictions, then they'll push down the price of gilts, thus increasing the real interest rate that the government pays on them and undermine the whole 'quantitative easing' strategy. Moreover, as Larry Elliot adds, even if the stimulus being implemented for this year (the last year of stimulus before austerity kicks in) were sufficient to bring about a recovery by the end of 2009, the idea of 3.5% growth from 2011 onward is "for the birds". Even in the most optimistic circumstances, in order to pay off the deficit any future government will ransack the public sector, slashing spending and selling off assets. They will also have to raise taxes, and probably not greatly on the rich or on corporate profits, thus eating further into consumption at a time of rising unemployment. Things can only get grimmer.