Economy in summer slowdown
Osborne feels heat ahead of Autumn Statement
BRITAIN’S economy slowed over the summer as a slump in manufacturing and construction dented the recovery, official figures showed.
Gross domestic product – the total size of the economy – rose by 0.5pc in the third quarter of the year following growth of 0.7pc in the second quarter.
It was the 11th quarter of growth in a row but the slowdown fuelled fears the global malaise is hurting Britain.
The services sector grew by 0.7pc between July and September but manufacturing output was down 0.3pc and construction shrank 2.2pc.
‘There are clear global risks and there is still much more to do to fix our economy,’ George Osborne said.
Analysts warned that a prolonged slowdown in Britain – should it materialise – would put further pressure on the nation’s creaking finances.
The Chancellor’s plan to slash the welfare bill by cutting tax credits was thrown out this week by the House of Lords.
Azad Zangana, senior European economist at Schroders, said: ‘The slowdown in UK growth is by no means a disaster but it presents an even bigger challenge for the Chancellor as he prepares to find a way to implement substantial fiscal tightening over the course of the next few years.’
George osborne was the master of all he surveyed as he delivered the first fully Conservative Budget for nearly 20 years in July. Having helped secure an unexpected majority at the general election in May the Chancellor set out an audacious plan to extend the Tories’ appeal – turning them into a party of workers and the North – as he parked his tanks firmly on Labour’s lawn.
But he now finds himself in a hole – and it is more than just the rebellion over his plans to slash tax credits that are causing alarm ahead of the joint Spending review and Autumn Statement next month.
official figures published in recent days show the economy is slowing in the face of global pressures and osborne is once again struggling to hit his deficit-reduction targets. This comes just as he asks cabinet colleagues whose departments are not protected from the axe to model budget cuts of 25pc and 40pc.
osborne put on a brave face yesterday despite the storm clouds gathering over Britain and the risk that his best laid plans could be blown off course.
‘We will continue to reform tax credits and save the money needed so that Britain lives within its means, while at the same time lessening the impact on families during the transition,’ he said.
‘I will set out the plans in the Autumn Statement. We remain as determined as ever to build the low-tax, low-welfare, high-wage economy that Britain needs and the British people want.’
The £4.4bn reduction in tax credits – part of a £12bn package of welfare cuts – was due to take effect from April 1 next year.
But it would have left 3.3m inwork households £1,300 worse off, according to the House of Commons library.
The Chancellor said he would listen to any proposals Labour had ‘to help in the transition’ to lower tax credits, but would not support proposals ‘promoting uncapped welfare and unlimited borrowing’.
But any changes to his plans are likely to cost money – putting fresh pressure on the nation’s finances as osborne struggles to balance the books.
The office for National Statistics last week revealed that the government borrowed another £9.4bn last month. That was down from £11bn in the same month last year and the smallest September deficit for eight years – but still amounted to nearly £315m a day as spending on welfare and public services continued to outstrip tax receipts. The government has borrowed £ 46.3bn in the first six months of the financial year – some £7.5bn less than in the same period last year and the best performance since 2008-09.
But analysts said osborne will struggle to hit his target of reducing borrowing from £90.1bn last year to £69.5bn this year without even deeper cuts than already planned.
The ernst & Young Item Club said the office for Budget responsibility could be forced to raise its borrowing forecast for this year to £76bn when the Autumn Statement is published alongside the Spending review on November 25.
Alan Clarke, UK economist at Scotiabank, said: ‘There is still six months to make up for lost time, but I suspect that the £69.5bn target for the year will not be met.’
Borrowing hit an all-time high of £153.5bn under Labour in 2009-10 and the failure to eliminate the deficit has pushed the national debt to record levels above £1.5trillion – or more than £60,000 per household. The government is spending almost £1bn a week servicing the national debt – something the Chancellor yesterday described as a ‘debt tax’.
‘government spending is still unsustainably high,’ he said after the borrowing figures were published last week. ‘That’s why we have to continue the hard work of identifying savings and making reforms necessary to build a resilient economy, which is what we’ll do at the upcoming Spending review.’
Tax receipts have soared to record highs as income tax, national insurance, corporation tax and VAT swell Treasury coffers. But a slowdown in the pace of recovery could hit wages, profits and spending in the coming months and years – holding back future receipts.
The oNS yesterday said the economy grew by 0.5pc in the third quarter of the year – down from growth of 0.7pc in the second quarter. The booming services sector continued to grow strongly, with output up 0.7pc, but manufacturing fell 0.3pc and construction slumped 2.2pc.
It was yet another setback to plans to rebalance the economy back towards manufacturing – and further evidence that the ‘march of the makers’ promised by the Chancellor has failed to materialise. The crisis in the steel industry has only darkened the mood. Not everyone is downbeat, however.
‘overall, the picture of a steady recovery in the UK economy continues,’ said John Hawksworth, chief economist at accountants PwC.
But there is no doubt the Spending review and Autumn Statement next month will be tougher for the Chancellor than his lap of honour at the Budget in July.