Remember the strengths of the UK economy

May 11 2010 Sarah Green, The Journal

AT THE time of writing, the UK is at a point of political uncertainty unprecedented in modern times and faces economic challenges not experienced for a similar period.

But it’s important to remember the strengths of the UK economy and to recognise what Britain needs to do to sustain social cohesion, public services and values, and a position in the world of which we can be proud.

After a long period of the economy driven by debt-fuelled government spending, the time has come to reset the dials, and create an environment in which private sector investment and trade can create jobs and wealth.

Government and business need to work together to rebalance the economy for sustainable growth.

There are signs of optimism. The mood of business people I meet around the region has shifted in the past few months. Most remain uncertain and worried about the outlook, but ask how their own particular company is doing, and an increasing number suggest that things are beginning to recover.

The balance of optimism in the CBI’s national Industrial Trends Survey is at a 14-year high. The latest IMF forecasts suggest that output in the UK will grow by 2.5% next year, only a tad slower than in the US, and noticeably faster than countries like Germany, France and Japan.

But given the depth of recession, a recovery on this scale is not much to write home about. But growth is the essential foundation for getting people back to work, for rebuilding public finances, and rebalancing the economy on to a sustainable path.

Sustaining this expansion at the same time as cutting the fiscal deficit will be a huge challenge for the next Chancellor. From a business perspective, it’s vital he gets on with the job. The UK’s fiscal position has deteriorated faster than in any other big economy in the past two years. When investors are taking a more jaundiced view of sovereign risk, there is a danger markets could take matters into their own hands if our Government is not seen to be getting a grip on the public finances. That would mean rising debt payments and higher interest rates.

And by posing the threat of even sharper tax rises and falling demand, it could easily snuff out the upturn in business confidence. The next Chancellor will have some advantages. Britain’s outstanding stock of government debt remains well below the Euro zone average.

And a substantial devaluation over the past three years has improved the competitiveness of British industry. But cutting a fiscal deficit this big is still a huge task. History shows that reining back current spending, rather than slashing capital investment or whacking up taxes, is much the most economically efficient path. The Chancellor will have to rely on a mix of all three. The pain can be spread over several years, and doesn’t have to be front-end loaded. What’s needed is a credible plan. This is where politics come in. We need a Chancellor to get on with the job.

Sarah Green is regional director of CBI North East