As the coalition government marks 100 days in office, we rate their attempts to fix our ailing economy.
We look at whether David Cameron and Nick Clegg have managed to fix the economy
The task list for the coalition government when it formed in May might seem a suitable script for Mission Impossible:
* Tackle the largest UK government debt in post-war history
* Slash government spending but simultaneously revive the economy
* Raise taxes but don’t terrify businesses
* Show enough determination on debt to stop a run on the pound, but don’t make sterling so strong that exporters get hit
* Get banks lending again for mortgages and business but make sure they have more safety capital put by too
* …And don’t make yourselves too unpopular to be re-elected
However, after just 100 days, the joint Conservative/Liberal Democrats government has set a blistering pace.
In policy and the economy, much has gone their way and they have got grudging public support for the more controversial measures that have yet to come.
“They should be pretty pleased with how things have turned out so far,” Vicky Redwood, UK economist at Capital Economics told MSN Money.
The new threat to the economy
Some improvement seen
The economy has grown by a surprising sprightly 1.1% in the second quarter, £6 billion of public spending cuts have already been implemented in the June Budget and much, much more will come from a detailed spending review due in October.
The jobless total is falling, with a record number of jobs created between April and June, though cuts in the public sector have yet to bite.
Growth was always going to be tricky. Despite the robust Q2 figures, the Bank of England has just revised down its forecast for economic growth in 2010 to 1.6%, down from the 1.7% it forecast in May.
That is still more optimistic than most economists, who expect growth of around 1.2%. For 2011, the Bank’s downward revision was even more marked, to 2.7% from the 3.4% it expected in May. Again, economists are more pessimistic, seeing just 2.1% growth.
Any growth is a blessing
Still, given the current circumstances any growth is a cause for relief. The biggest test comes in the future, when public sector cuts could result in a torrent of new jobless claims.
“We think that the private sector will be unable to compensate for the public sector jobs that are being lost,” said Redwood, who forecasts unemployment to peak at three million in 2012, up from the current 2.46 million.
More work to be done on banks
The coalition has fallen down badly over one particular roadblock in the economy: the banks.
While £85.5 billion of taxpayers’ money is still tied up supporting banks, lenders have turned from being utterly profligate with credit to very cautious – at a time when many businesses are crying out for loans.
That is partly because new lending is being outweighed by existing customers repaying debt, but also because banks are following regulatory commands to bolster their capital bases. To add insult to injury, the bonus culture shows no sign of disappearing from the banking sector.
Have the bankers won?
National debt still ominous
It is also too early to see progress on reducing the national debt, which currently stands at £814 billion and is due to peak at £1.3 trillion in 2015/16.
However, it was vital to reassure those who are funding it by lending the government money.
Nobody wants Britain to become another Greece, which has to pay overdraft-type rates to get investors to lend to it. So the unequivocal statement by chancellor George Osborne that dealing with debt was the top priority was well-received from day one.
As a result, the pound has been buoyant. Its trade-weighted index has strengthened from 80.2 at the time of the election to 81.9 now, and well above the record low of 74 plumbed in November 2008.
Some of that is due to troubles within the eurozone, but it shows that sterling remains a refuge from risk.
Trade figures have improved too, showing that exporters are doing better than at any time since the start of June 2008.
Radical cuts are the biggest challenge
However, it is in the radical plans to cut the size of the public sector that the biggest challenge will come.
With a leaked memo within the Justice Department foreshadowing cuts of £2 billion from its £9 billion budget and 15,000 job losses, this is going to be just one of a number of explosive debates over the £621 billion a year the state spends.
“Given the scale of the savings they are looking for, unprecedented since World War II, something radical was required,” said Gemma Tetlow of the Institute of Fiscal Studies.
While there are plenty of critics who see public services as intrinsically unsafe in the hands of Conservatives, the anxiety has been partly neutralised by the inclusion of left-leaning Liberal Democrats in the coalition. The coalition has successfully argued that cuts are driven by need and not by ideology.
However, sensitivity will still be important, something that education secretary Michael Gove learned when his list of education authorities to be removed from the new schools buildings programme had to be corrected again and again.
Expensive food costs keep inflation high
Reshaping rather than cutting
Where the coalition gets its top marks is for preparing the public for a reshaping of public service provision.
Cutting frontline services or cutting the pay and conditions of those who provide them may be tenable when cuts of 5% are required. If the cuts are closer to 40% – the figure that Whitehall has been told to plan for – then they are not.
Instead, there is starting to be a complete rethink of the mechanism through which state services are delivered.
That is where innovative outsourcing deals, like Rotherham’s local authority joint venture with BT, which has so far saved £28 million, can come in.
David Cameron’s Big Society idea also neatly dovetails with the role of volunteer organisations like Homestart in child health and Tomorrow’s People in welfare to work, roles which it is hoped will bring better results – and save money.
Still, that doesn’t help much in cushioning the blow. The biggest spending departments, Health and Work & Pensions, spend most of their cash on staff. That has to fall because these two account for a third of the public sector.
Talking the talk
In just 100 days, we’ve heard a parliament’s worth of policy pronouncements. Tough as it was, the talk remains the easy part.
The hardest work for the coalition in cutting public spending has yet to be done. The drip-drip of details about closures, job cuts and dislocation that will emerge on the ground is sure to spark uproar as it becomes known.
The first casualty in that is likely to be public confidence, and when complaints reach an uproar, as well they may, the second casualty may well be the integrity of such an unlikely coalition.
The last thing David Cameron wants to hear is another phrase redolent of Mission Impossible: “This coalition will self-destruct in five minutes.”
Read original article 100 days to fix the economy
Nick Louth, columnist, MSN Money
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