Employers say cuts ‘arriving at wrong time’

10:00 am - October 6th 2010

by Newswire    

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The economy grew at a reasonable pace in the third quarter but businesses are increasingly alarmed about the prospects for another recession or much weaker growth, according to a closely watched survey of companies.

Growth between July and September looks likely to have been 0.4 to 0.5 per cent, according to polling company Markit, an estimate based on its surveys of purchasing managers in the service, manufacturing and construction sectors.

That is not far from the 0.6 per cent long-run average pace at which the UK has grown, but it is much slower than the 1.2 per cent growth in the second quarter. Markit warned that many companies are worried about spending cuts, with greater detail on the austerity measures due later this month in the government’s spending review.

“There are widespread worries that the economy is losing steam rapidly and that the recovery is at risk,” said Chris Williamson, chief economist at Markit. “Orders are not coming through at anything like their pace before and public sector contracts are being cut. Businesses believe these cuts are arriving at the wrong time.”

…more at the Financial Times

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Reader comments

Around the time of the March budget, I think the economy was forecast to grow by around 1.5% this year. Now it looks to be set to grow by closer to 2.5%.

Doesn’t that suggest that the structural element of the deficit – the bit that won’t be eliminated just by the effects of economic growth – is somewhat smaller than we thought, and that we should therefore revise downwards the level of spending cuts & tax rises we judge to be needed in order to reduce or eliminate it?

1% growth is about £15 billion I believe, which means – I think? – an increase in tax revenues of around £6-£7 billion. And presumably the welfare bill falls along with 1% extra growth too, maybe by £1 billion or so (= saving from 150,000 more people in work).

So surely we have to conclude that the structural deficit is at least £7-£8 billion lower than we thought, even if we think the increased growth we’ve seen this year won’t be maintained.

And of course, if your target for deficit reduction is to get it below a certain proportion of GDP, that target rises in cash terms as GDP grows. If GDP is £1500 billion, 5% of GDP is £75 billion; if it’s £1515 billion, 5% of GDP is £7.75 billion. That’s £750 million you don’t have to cut to hit a target of 5%.

This is back-of-an-envelope stuff I know – just curious as to what more knowledgeable people are saying about the implications for the structural deficit. On the face of it, as I say, it must be at least £8 billion or so lower than we thought, and that’s £8 bilion of cuts we now don’t need to make in order to hit whatever target we favour for deficit reduction.

That’s not to be sniffed at in itself. But if the OBR decided, in light of this year’s figures, that we should revise the growth forecast for the next five years upwards by 0.3% a year (say), the picture changes very radically indeed. That would amount to an announcement that the structural deficit is – what? £25 billion lower than we thought? In which case Labour could stick to their guns on halving the deficit in four years while pretty much refuting the need for any spending cuts at all.

From the Torygraph today:

“IMF warns UK cuts must stop if growth slows . . The fund’s latest World Economic Outlook (WEO) report also raised the prospect of another fall in UK house prices, cautioning that property is overvalued.”

Curiously, just a few days ago we had this:

“Bad news for two Eds: IMF backs George Osborne”

News update:

In Thursday’s Financial Times: Move to delay UK spending cuts

“The Treasury is working on plans to ‘reprofile’ spending cuts next April, spreading the pain of deficit reduction more evenly over the next few years, senior Whitehall officials have told the Financial Times. . . ”

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  3. Clapham Town

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  4. Pucci Dellanno

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