Friday, May 27, 2011

Slowdown in Spending Cuts Worry OECD

Source: OECD

Concerns over the strength of the UK recovery continue to materialise. The OECD's recent report downgraded economic growth from to 1.4% (last May the forecast was 2.5%)

The latest GDP figures show that consumers have reduced spending to the lowest level since the height of the banking crisis. Households have been hit by the unwelcome combination of rising prices, rising taxes and stagnant wage growth. Given the decline in real wages it is not surprising that household spending has continued to decline. The bad news is that the governments' spending cuts have still not been fully implemented - there could be more bad news and growth downgrades in the months to come.

The chancellor George Osborne has so far resolutely stuck to his stringent spending cuts. He makes the case that spending cuts are essential to bring the UK's record budget deficit under control. However, his hope that the private sector would take the place of government spending is so far not materialising. Business investment, which is often volatile and an indicator of underlying confidence in the economy fell 7.1% in the first half of the year.

Unfortunately, this slow down in growth and persistent unemployment will make it more difficult to achieve targets for the budget. As Ireland, Greece and Spain are discovering, austerity measures are no guarantee to plug the budget deficit.

Though the OECD do say there is a necessity of reducing government borrowing, they also suggest the government needs greater flexibility and should growth continue to fall then they will need to be adaptable and delay spending cuts to prevent further falls in economic growth.

This might be embarrassing for a chancellor who has staked his reputation on appearing 'tough'. But, for the UK economy, slowing the pace of austerity may be a real necessity to avoid another recession.

Source: Graph top: OECD

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