When the rating agencies strip Britain of its AAA credit rating – as they almost certainly will – George Osborne’s strategy will be in complete tatters.
The strategy has failed. The public knows it. The International Monetary Fund knows it. The credit rating agencies know it. Even George Osborne knows it, although he can’t bring himself to admit as much.
Here is a brief résumé of how things stand for the economy after two and a half years with the coalition government at the helm. National output has just contracted for the fourth quarter in the last five. The only quarter of 2012 in which the economy expanded was the one that contained the London Olympics, and unfortunately for the chancellor these sort of jamborees happen once every half century rather than once every three months.
During 2012 as a whole the economy registered no growth at all. Nothing. Zilch. A big fat zero. The level of gross domestic product is 3% below where it was when the recession started, a weaker performance than during the 1930s. Royal Bank of Scotland says the four-year performance of the economy between 2008 and 2012 is the weakest since the 1930s apart from post-war mobilisations.
Industrial production was to blame for the drop in output in the final three months of 2012, with factory output back to levels last seen in the early 1990s. Rebalancing is a pipedream. Unsurprisingly, the Treasury’s deficit reduction programme is well off track. This is an abysmal record.
Sure, there are all sorts of excuses that can be trotted out to explain away the fact that three years after the recession first ended GDP is still contracting. The crisis in the eurozone hasn’t helped. Rising commodity prices have raised business costs and acted as a brake on consumer spending.
But the government also sucked demand out of the economy by raising taxes, cutting welfare and by taking the axe to capital spending programmes. The blood-curdling rhetoric from Osborne in 2010 about Britain being a Greece in waiting had the entirely predictable effect of shredding consumer and business confidence.
So what happens next? Clearly, there is a risk that the first quarter of 2013 will also be negative. The economy is fundamentally weak and the heavy snow of the past week will not have helped.
Against this backdrop, there will be mounting pressure for further steps to get the economy moving. Ideally, action would come from the chancellor himself in the budget in the form of tax cuts and higher spending on small-scale infrastructure projects that can be started immediately.
In reality, changes to fiscal policy are likely to be small scale and cosmetic. Osborne will rely, as he has for the past two and a half years, on the Bank of England to do the heavy lifting. Further monetary easing looks inevitable, even though a combination of 0.5% bank rate and £375bn of quantitative easing has proved ineffective until now.
Politically as well as economically, these figures are a disaster for the government. It ensures the next few months will be spent debating whether the UK is heading for a triple dip and how soon the credit rating agencies will strip Britain of its AAA credit rating. When that happens – as it almost certainly will – Osborne’s strategy will be in complete tatters.