UK economy in dire straits

FORGET snow — every part of the Office for National Statistics report on the economy was bad news: household spending, business investment, services, finance, construction, even previously hopeful manufacturing figures — all revised downwards — plus declining house prices and anything else you can measure.

The one shard of hope is that the lunatic tendency on the Bank of England’s monetary policy committee (Andrew Sentance) may be silenced on raising interest rates. Rising inflation is almost entirely beyond British control — oil and commodity prices. While real pay falls for all but bankers and FTSE boardrooms (up 55 per cent), there is no home-grown wage inflation. Imagine the mayhem in raising the cost of mortgages and business borrowing just as hundreds of thousands more lose their jobs.

If things are this bad before the serious austerity has begun, what lies ahead? April will indeed be cruel — and frightening as the great £81bn axe falls. This is a real-life economic experiment, one last chance to prove that Herbert Hoover was right after all and Franklin Roosevelt and Keynes wrong. Or that Churchill was right about the gold standard — except these days its equivalent is the deficit.

The Treasury’s breezy “don’t care” riposte to the new figures was alarming in tone and content: “It doesn’t change the need to deal with the nation’s credit card — the country is borrowing more this year than is spent on the entire NHS.” That is cheap propaganda, not economics — a sign that Treasury civil servants have become a missionary cadre. We can only hope this bravado disguises anxiety — and a readiness to U-turn if nothing improves. But the “no plan B” chancellor shows no sign of it.

Only a month to go. The shock in April will be profound. Ben Page of Ipsos Mori says: “People have no idea how their pay packets will change. Three-quarters expect to be affected, but they don’t know how.” Cameron-supporting papers sound no alarm, and television doesn’t begin to convey the coming severity. People are still foxed by a government whose every word belies its actions — Cameron still pretends the NHS, education and Sure Start are protected, and only public sector fat is cut; private companies will pick up the unemployed, banks are being seriously taxed and a “big society” will burst forth.

Add “not” to everything he says and then you see how the cuts fall everywhere while charitable giving drops: 30,000 give-as-you-earn payroll donors just dropped out. A survey this week shows most large companies and 70 per cent of small ones won’t employ public sector staff, no doubt prejudiced by the daily Eric Pickles and Francis Maude anti-public servants hate campaign.

It hasn’t begun yet. Library and Sure Start doors begin closing in April. Rising NHS waiting times are hidden by not letting GPs refer. From 31 March, 300,000 public-sector staff and more from the voluntary sector start to be fired. And most families earning over £18,000 will find pay packet cuts in tax credits and national insurance, according to the Institute for Fiscal Studies.

Child benefit is frozen for three years — a cut of 10 per cent or more at current inflation. Public employees’ pay is frozen for two years. In April the lowered threshold for the 40 per cent tax band brings another 750,000 earners into the higher rate; anyone on £50,000 loses £500 a year, just as wages fall further behind an inflation they see emblazoned outside every petrol station inflation. By 2015, 25 per cent of earners will be on the 40 per cent rate, the IFS reckons, up from 11 per cent (though no doubt pre-election tax giveaways will ease that).

How explosive will all this be? Ed Balls recalls the disastrous abolition of the 10p tax rate: it passed parliament with hardly a murmur — but when implemented a year later it went nuclear. Mori’s Ben Page says this is unknown territory: the cuts are so deep that public rage may become burned into the national psyche, even if the economy picks up and even with pre-election tax bribes. “They are now 10 points behind. Thatcher, hated for her cuts, was only saved by war and a disastrous opposition.”

However, Cameron is still popular and the Tory vote has not dropped: so far Labour scores only at Lib Dem expense. But Page points out that, for the first time, support for cutting the deficit has dipped below 50 per cent.

—The Guardian, London