The flags were re-hoisted following Maggie Thatcher’s funeral on the news that Britain has avoided a triple dip recession (for the time being). The chancellor George Osborne must have had a broad grin on his face although he was careful to be cautious about the future. Before we all get carried away we should point out that the economy is 2.7pc smaller than its pre-recession peak in 2008.
The importance of Thursday’s news on GDP cannot be underestimated, not for its economic and social impact but for the political breathing space it provides David Cameron - more of this later. The announcement on Thursday, contained as much bad news as good - Manufacturing shrank by 0.3pc but that was down to a terrible January, February and March have been stronger.
Closer inspection of the GDP numbers show the dreadful state we are in. The chart below takes the difference in weighted GDP contribution between 2009 and the last quarter’s results.
On the positive side our financial service industry, despite the worst of intentions from all sides, has kept its head above water and retailing is dead flat. What is truly horrifying is that government spending has grown the most, this shows the unbelievably poor job the Government is doing on deficit reduction. Otherwise it’s a sea of red, with Construction, Manufacturing and Mining (North Sea Oil) showing the biggest negative impacts. If the chancellor had been true to his word and reduced government spending imaging how bad the GDP numbers would be!
To turn this around we should take the following actions:
- Reduce VAT (Sales tax) on construction to Zero and try to manage down house prices by build many more homes.
- Provide further incentives for North Sea Oil exploration, Nuclear energy development, and Shale gas fracking
- Raise interest rates to provide savers and our financial service industry some impetus – and cap a possible increase in housing costs. This will also force zombie companies and indebted householders to confront their debts. This will create some short term pain but it’s vital work and it needs to start now.
- Reduce VAT generally to help consumer spending
- Raise some money through the sale of the public’s stake in Lloyd and RBS – create a bad bank to hold their toxic assets and sell the good bits this year.
- Start cutting back on government spend in earnest – we need to prune back on Health and Welfare immediately
- Bring forward and start executing some kind on industrial strategy – Vince Cable was meant to deliver this 3 years ago, he should be removed and Ken Clark should be given a crack at this.
- Oh yes! And final let’s have a new chancellor who can start cutting public expenditure! Weirdly these numbers give David Cameron a bit of breathing space to shuffle his cabinet and get some fresh talent into Number 11 Downing Street
Previously I have looked at GDP and our options for growth at: