IFS: Recession Worse Than It Should Have Been Due To Labour Spending

(Telegraph) – THE RECESSION was far worse that it should have been because Gordon Brown allowed spending to spiral out of control, a damning report has claimed.

The study from the independent Institute of Fiscal Studies blamed Mr Brown for over-spending before 2007 for the severity of the recession faced by Britons.

Mr Brown’s policies as Chancellor meant that Britain is now suffering from “one of the weakest fiscal positions” among developed countries, the IFS said.

This was because Mr Brown had refused to match spending rises with tax increases after 2001, forcing the UK to borrow heavily up to and through the recession.

Only Iceland and Ireland, which have suffered heavily in the downturn, are likely to have seen a bigger increase in debt than Britain between 2007 and 2010.

The report came as experts from Ernst & Young’s Item club said that the immediate prospects for the economy were “dismal”, with it struggling to grow by more than 1 per cent this year.

The report found that the UK economy will remain stuck in the doldrums this year with an export-led recovery unlikely to emerge until 2011.

It also comes at the beginning of a key week for economic figures, with official statistics on the gross domestic product, employment and inflation due to be published.

Although gross domestic product increased by 0.4 per cent in the fourth quarter of 2009, economists have warned that the risk of a double dip recession remains.

The report from the independent IFS is a major embarrassment for Mr Brown, who was Chancellor for 10 years until 2007 when he succeeded Tony Blair as Prime Minister.

Carl Emmerson, the IFS’s deputy director, said few other Western countries “would look at us with any envy”.

The Conservatives said the report was a “damning verdict” that showed how the UK had been “left Britain badly prepared for the longest and deepest recession since the war”.

The Liberal Democrats said it showed that the public finances were in an “abysmal state”.

Britain is already struggling under a debt mountain. Official forecasts suggest national debt is set to double to £1.4 trillion in 2014/15 – or £23,000 for every person in the country.

The IFS praised Labour for sticking to tough spending plans in Government between 1997 and 2001. The party had already made a commitment to follow spending plans set out by the previous Tory Government.

However the IFS identified a damaging period of “fiscal drift” between 2001 and 2007 when debt mounted to pay for spending on public services.

It said Mr Brown’s refusal to match spending rises with tax increases after 2001 had meant the UK had been forced to borrow heavily, up to and through the recession.

While Britain’s spending was the second highest among developed countries in the 10 years to 2007, its tax increases were only fifth highest over the same period, it said.

The result was that on the eve of the financial crisis in 2007 the UK was left “with one of the largest structural budget deficits in the developed world”.

The IFS said: “Mr Brown is fond of reminding us that this has been a global financial crisis. However the UK … has experienced a worse deterioration in its fiscal position than many other industrialised countries.”

Part of the blame lay with the Government using “unduly optimistic” forecasts to justify not raising taxes, it said in the report, titled “The Public Finances 1997 to 2010”.

The IFS blamed “weak performance of tax revenues that was unanticipated by both the Treasury and most independent observers”.

There was also “excessive optimism in the Government’s fiscal projections, which the Government used to justify its decision not to raise taxes further”.

Philip Hammond, the shadow Chief Secretary to the Treasury, said the report showed that “the only time the public finances improved under Gordon Brown’s regime was during the first few years, when he was following Conservative spending plans.

“The subsequent years of ‘fiscal drift’ left Britain with one of the biggest structural budget deficits in the developed world.”

Vince Cable, the LibDems’ finance spokesman, said: “The reality is that the public finances are now in a pretty abysmal state and neither Labour nor the Conservatives have a remotely credible plan as to how they will tackle this problem.”

A Labour spokesman said: “The IFS confirm that in the decade ahead of the financial crisis, we got borrowing and debt down compared to levels we inherited from the last Tory Government – while still supporting investment.

“And while debt has risen due to the biggest global economic crisis in modern times, the extra support we’ve put into the economy is working.

“Recovery is beginning and we’ve seen far fewer businesses fail, fewer homes repossessed and lower unemployment than predicted.”

Labour Under Pressure As Europe Tells Britain: Cut Deficit Faster, Deeper

(Guardian) – LABOUR’S STRATEGY for controlling Britain’s spending was tonight under fresh challenge when it emerged that the European commission is preparing to demand tougher government action to rein in the UK’s record peacetime deficit. In findings which were seized upon by the Conservatives, Brussels warned that the current plans for repairing the black hole in the budget left by a deep and long recession needed to be more ambitious.

“A credible time frame for restoring public finances to a sustainable position requires additional fiscal tightening measures beyond those currently planned,” said a draft report, due to be approved by the commission , but leaked to the news agency Reuters. It added: “The overall conclusion is that the fiscal strategy in the convergence programme is not sufficiently ambitious and needs to be significantly reinforced.”

The findings are likely to stoke what has become the pivotal political row between the two main parties ahead of next week’s budget, and the general election campaign that will follow.

They will add to pressure on the prime minister at a time when Labour’s new-year resurgence appears to have stalled. An ICM poll for the Guardian tomorrow shows the gap between the parties has increased, to a nine-point Conservative lead over Labour. It also suggests that Brown’s personal unpopularity with the electorate remains a drag on the party’s standing, even though the Tories have been beset by their own problems in recent weeks.

The European commission is set to warn that on current plans the UK will not meet the 2014-15 deadline for reducing the budget deficit to below 3% of national output. Chancellor Alistair Darling’s proposals envisage the gap between spending and taxes being reduced to 4.7% of gross domestic product, but the commission said even this target might be missed as a result of weaker growth than the Treasury is expecting.

The assessment provided some support for Darling ahead of next week’s budget, when it said the plans for the coming fiscal year were adequate, but the findings will increase speculation in the markets that the election will be quickly followed by fresh measures to cut spending and raise taxes, whatever the result.

The shadow chancellor, George Osborne, claimed the report was a heavy blow for the prime minister. “The Conservatives have been arguing that we need to reduce our record budget deficit more quickly to support the recovery. Our argument is backed by credit rating agencies, business leaders, international investors and now the European commission. That is why we need a change of government to restore confidence in our economy at home and abroad.”

A Treasury spokesman said the government was committed to halving the deficit over four years and that such a cut would be the sharpest among the Group of Seven industrialised countries. “The chancellor has taken a judgment on the appropriate pace of adjustment in 2010-11 and beyond,” the spokesman said.

This takes into account “the uncertainty around prospects for the public finances given the exceptional nature and strength of the global downturn, the need to support the economy through the early stages of the recovery, and the need to deliver sustainable public finances,” he said.

While tomorrow’s poll will be dispiriting for Labour, it is also clear that voters are not convinced by the Conservatives.

The survey shows only 18% think Britain would be best served by a strong Labour win. And though almost a third think a clear Conservative victory would be best, 44% want a hung parliament in which the government works with smaller parties such as the Liberal Democrats.

The Tory leader is 11 points ahead of Gordon Brown as the man voters want to win, and 20 points ahead as the leader best campaigning for “the votes of people like you”. He has a 14-point lead as the most competent for prime minister, and an 11-point lead as the man most likely to lead Britain in the right direction.

The figures call into question recent excitement about a Labour fight back. The Tories, at 40%, are up three on the February Guardian poll, and up two on another more recent ICM poll last weekend. The Liberal Democrats are on 20%, unchanged since the last Guardian/ICM poll, while support for other parties is on 9%. Conservative support has been within three points of 40% in all ICM polls since October.

Brown is likely to try to stay on even if he loses power, but a close result could mean there might have to be another election this year. Questioned on BBC Radio 4’s Woman’s Hour, Brown said: “I will keep going. I will keep going because I want a majority.”

Asked whether he owed it to the Labour party to stand aside if he did not secure a majority, he said: “I think I owe it to people to continue and complete the work we’ve started of taking this country out of the most difficult global financial recession.”

ICM Research interviewed a random sample of 1,002 adults by telephone on 12-14 March 2010. Interviews were conducted across the country and the results have been weighted to the profile of all adults. ICM is a member of the British Polling Council and abides by its rules.

GDP Growth Revised Upwards

(Telegraph) – GORDON BROWN’S ELECTION PROSPECTS have been boosted after official figures showed that Britain’s economy expanded by more than expected in the final quarter of 2009.

The Office for National Statistics said that the UK’s gross domestic product – the broadest measure of overall economic performance – increased by 0.3pc in the final three months of 2009, rather than the 0.1pc expansion it had previously estimated. The revision was higher than most economists had expected, and supports suspicions in the City that the economy is in fact starting to bounce back from its deepest recession in living memory.

The expansion is nevertheless slightly lower than economists had anticipated before last month’s release of the first estimate for growth, which sparked fears that Britain could be subject to a double-dip back into recession this year. It will also spark suspicions in Whitehall that the Prime Minister may call a snap election on the back of the news – though most think the polls will be in May.

The ONS said the revision was largely due to a stronger performance from the services sector, which accounts for 75pc of UK economic output. It said the UK recorded the strongest growth in services output and household expenditure since the first quarter of 2008 – in other words since the recession began. It was also supported by a smaller-than-previously-thought decline in inventories, as companies slowed the rate at which they have been feeding off stockpiles.

The ONS added that the revision was largely due to a strong December performance – the figures for which were not available at the time of the first estimate of growth last month.

“Overall, the upward revision is welcome,” said Jonathan Loynes of Capital Economics. “But does not alter the picture of a very fragile recovery.”

Spectre Of Double-Dip Recession Looms

(Guardian) – FEARS OF A DOUBLE-DIP RECESSION and a sterling crisis in the run-up to the election were raised last night amid news of collapsing investment in British industry and a warning from one of the world’s leading financiers that the pound could plummet within weeks.

The pound fell sharply on the foreign exchange markets after a day of grim economic news which saw an admission from RBS that it had missed government targets for business lending, a downgrading of the UK growth prospects by the European commission and a warning from the CBI that consumer spending was likely to remain weak ahead of polling day.

Sterling, already down by a cent against the dollar following the release of official figures showing capital expenditure plunging by almost a quarter between late 2008 and late 2009, saw its losses doubled after Jim Rogers, the former business partner of speculator George Soros, said sterling was a potential “basket case”.

“Other currencies aren’t strong and the euro has real problems, with cracks much wider than Greece beginning to show,” Rogers said, “but it’s the pound that’s most vulnerable. In real terms, it’s already devalued against virtually every currency barring the Zimbabwean dollar and it’s especially exposed over the weeks running up to the UK election. In a basket of currencies, the pound is potentially a basket case. That will put Britain in an extremely bad position.”

On the eve of eagerly awaited official growth figures, loss-making RBS said weak demand for finance from companies left it well short of the targets set by Alistair Darling, the chancellor, when he allowed the bank to park troubled assets with the government. Data from the Office for National Statistics showed that investment was 24% lower in the final quarter of 2009 than a year earlier. Hopes that businesses would start to invest again late last year were dashed by a 5.8% drop in capital expenditure during the quarter.

City analysts said it was “touch and go” whether today’s revision to gross domestic product data for the final three months of 2009 would show that growth was stronger than the 0.1% estimated last month. Colin Ellis, European economist at Daiwa Securities, said the investment figures were “consistent with no upward revision to headline GDP growth – although we would not rule out the possibility of changes in either direction.”

Meanwhile, the European commission singled out Britain as one of the few European Union countries where growth prospects had weakened since the autumn. Brussels expects Britain to grow by 0.6% this year, compared with a previous forecast of 0.9%.

Concerns about the durability of the pick-up in activity were not confined to the UK. Shares on Wall Street fell sharply after the weekly jobless figures rose from 474,000 to 496,000. Although some analysts blamed temporary lay-offs caused by the bad weather, the persistence of high unemployment was enough to shave more than 150 points off the Dow Jones industrial average in early trading.

The CBI, despite reporting a bounce-back in high-street spending in the first half of this month, warned that the outlook for consumer spending before the expected May election was unpromising.

Andy Clarke, chairman of the CBI’s distributive trades panel and the chief operating officer at Asda, said: “The next four months are going to be pretty tough. Last year was a challenge. This year will be equally challenging.”

In its quarterly snapshot of spending, the CBI said supermarkets, clothing outlets and stores selling household goods had all enjoyed better trading conditions following the prolonged cold snap in January. But Clarke said rising fuel prices, pay freezes and consumer jitters over the possibility of a post-election rise in VAT meant times were tough for ordinary families.

Further evidence of the fragile state of the economy was displayed when RBS admitted more of its customers had repaid loans than were granted them in 2009. The bank was set targets by Alistair Darling to lend an additional £9bn to the mortgage market and an extra £16bn to creditworthy businesses, in return for being allowed to insure £282bn of troublesome loans in the government’s asset protection scheme.

RBS lent £11.8bn to those seeking home loans, but business lending fell by £12.2bn, as customers raced to repay their debts. Overall, the bank lent £80bn in 2009 but saw £80.4bn repaid.

The data from RBS supported statistics released by the Bank of England last week which showed that lending to companies fell last year for the first time since records began. Chris Sullivan, head of RBS’s corporate banking business, insisted the bank was doing everything it could to lend. “It’s not about the cost of loans, it’s about the confidence of the market,” said Sullivan.

Fears Over Economic Recovery As Business Spending Slashed

(Guardian) – INVESTMENT BY UK BUSINESSES on new buildings and equipment plunged by a record amount over the past year, casting fresh doubts over the strength of Britain’s recovery from recession.

The Office for National Statistics reported this morning that business investment fell by 5.8% between October and December 2009 compared with the previous three months, worse than City analysts had predicted. The decline means that business investment was 24.1% lower at the end of 2009 than at the start – the worst annual decline since records began in 1967.

The fall was particularly acute in the manufacturing sector, where business investment plunged by 35.3% during 2009.

Howard Archer, economist at IHS Global Insight, said the data was “truly dire”, undermining hopes that UK GDP for the fourth quarter of 2009 could be upgraded tomorrow. Archer warned there was even a danger that the first estimate of 0.1% growth could even be downgraded, which would mean that the UK was still officially in recession.

“Furthermore, the sharp overall and ongoing decline in business investment could threatens to have significant long-term damaging repercussions for the economy’s potential output,” he added.

Business investment makes up more than 10% of overall UK GDP.

David Kern, chief economist at the British Chambers of Commerce (BCC), agreed that the preliminary business investment figures showed “alarming declines”. He said companies had been forced to conserve cash and not spend on new equipment, a decision which would make it harder for British industry to grow in the future.

“In the face of weak demand and acute financial pressures, businesses have had little choice but to slash investment and stocks in order to survive. But, such a situation cannot persist over the long-term without damaging consequences,” Kern warned.

“In order to promote investment, companies need continued support now – and the confidence that a credible plan is in place to mend our public finances as the recovery takes hold,” he added.

… (26/02/2010) – Spectre Of Double-Dip Recession Looms

Britain Crawls Out Of Recession

(Reuters) – BRITAIN only just crept out of an 18-month recession at the end of 2009, suggesting any monetary tightening remains a long way off and raising fears about the prospects for recovery ahead of an election due by June.

The Office for National Statistics said on Tuesday gross domestic product rose by 0.1 percent between October and December, well below analysts’ forecasts for growth of 0.4 percent and lower than all the predictions in a Reuters poll.

For 2009 as a whole, the economy shrank by 4.8 percent — the worst yearly performance since records began in 1949.

The Labour government has been banking on a strong bounce back to growth to help overturn its poor opinion poll ratings before an election expected in 100 days, but these weaker than expected figures make a political comeback even trickier.

“You can see there is a lot of uncertainty and therefore you would expect as you come out of recession for things to fluctuate,” Labour finance minister Alistair Darling said.

“I think we are now on a path to recovery … you need to maintain your support, don’t pull the rug from under our feet at the very time that we can see recovery.”

Sterling fell and gilt futures rose after data, which also showed output fell 3.2 percent from the same period a year ago. From peak to trough, the economy contracted six percent — far worse than the downturns of the early 1980s and 1990s.

For a graphic, click on: link.reuters.com/jak75h

“We know there are significant headwinds in Q1,” said Ross Walker, an economist at RBS Financial Markets. “Overall, the headline is disappointing but actually the underlying picture looks more worrying.”

Most analysts predict the Bank of England will halt its 200 billion pound asset buying programme — designed to pump money into the economy — next month, but Tuesday’s GDP figures are likely to boost expectations that any interest rate rises from the current record low of 0.5 percent are many months away.

Nonetheless, whichever party wins the election will have to enact dramatic fiscal tightening at some point to rein in a record budget deficit, which will be a major drag on growth.

The government has a four-year plan to halve the deficit — set to top 12 percent of GDP this year. But the Conservatives, ahead in opinion polls, say that is inadequate and pledge to start tightening fiscal policy this year, earlier than Labour.

“After this great recession, any signs of growth are welcome,” said Conservative economics spokesman George Osborne.

“We urgently need a new model of economic growth that includes a credible deficit reduction plan that keeps mortgage rates low, creates jobs and doesn’t choke off recovery.”

While Prime Minister Gordon Brown has argued his decisions have helped Britain weather the global storm, the UK is the last of the major economies to exit the downturn.

The latest figures may also increase doubts about the pace of global recovery as Britain is also the first G7 country to report GDP figures for the fourth quarter.

Evidence from the euro zone suggests its economy may have grown at a glacially slow rate in the last quarter of 2009 and the first quarter of this year.

Britain’s recession was the longest on record and policymakers expect a long slog to get the economy back to pre-crisis levels and warn the road to recovery will be rocky.

The Bank has said the extent of any fiscal consolidation will have an impact on monetary policy and analysts say sharp cuts in government spending and big tax rises may result in interest rates having to stay lower for longer to compensate.

Some economists said the preliminary estimates of GDP could be revised upward but there are also concerns about the strength of private demand, which will need to improve greatly to establish a sustainable recovery.

Bank Governor Mervyn King has said stimulus measures and a weaker pound remain the main supports to growth.

‘Full Monty’ Effect Of Recession

(Telegraph) – MEN HAVE BEEN HIT HARDER BY THE RECESSION, creating a “Full Monty” effect, said researchers at the Conservative-leaning Policy Exchange.

Official figures show that the number of men of working age with jobs has fallen from 92 per cent in 1971 to 75 per cent. The number of women who are employed has risen from 56 per cent to 69 per cent, narrowing the gap between women and men to 6 per cent.

The recession has had a disproportionate effect on men, with the number of women in employment increasing since June, while the number of men has continued to fall.

Neil O’Brien, director of Policy Exchange, said: ‘We are having a Full Monty-style recession with women faring much better than men.

‘As Britain has lost industrial jobs over the last couple of decades, the number of men in work has collapsed, and the numbers on benefits soared. The current recession is accelerating this trend further.’

The 1997 film, the Full Monty told the story of a group of unemployed steel workers in Sheffield, who became strippers. Because men have traditionally been employed in the manufacturing industry, while women worked in service industries, men have been worse affected by the lengthy decline in British manufacturing.

The manufacturing sector fell by an average of 1.2 per cent every year in the last decade and the loss of jobs in the financial sector has also affected men.

Part-time employment has remained relatively buoyant and public-sector employment, where women are strongly represented, is strong.

The number of men in employment fell three times more than the number of women in one year, with the employment rate of women falling by 2.8 per cent up to September 2009 and the employment rate of men slumping by 8.8 per cent.

The Conservative work and pensions spokesman Theresa May said: ‘Unless Labour address the growing skills gap in the economy we risk losing a generation of men to a cycle of worklessness.’

There are already more 16 and 17-year-old women in employment than their male equivalents. While 30 per cent of young women have jobs, only 23 per cent of men are working.

According to the Local Government Association, Britain risks the creation of a ‘lost generation’ of young people falling into long-term unemployment because of the recession.

Previous recessions have left increasing numbers of people excluded from the labour market – in particular amongst the under 25s and the over 50s.

The total number unemployed in the UK currently stands at 2.49 million – or 7.9% of the population – following hundreds of thousands of job losses in 2009.

According to the latest forecast from the Chartered Institute of Personnel and Development, unemployment will peak at 2.8 million in the summer of 2010.

According to Mind, the mental health charity, the recession is causing an increase in mental health problems among men because of fears over redundancy and lack of money.

More than a third are feeling worried or low and middle-aged males are seven times more likely than women to have suicidal thoughts.

The charity said, 2.7 million men in England currently have a mental health problem like depression, anxiety or stress.