Britain is now on par with the very worst of the great depression, with the economy shrinking by 4.9% in the year to the first quarter of 2009, according to the Office for National Statistics (ONS).
The fall in gross domestic product has been greater than had previously been calculated, as Government statisticians have become aware of the full scale of the fall in company activity and resulting falling tax revenue. According to the ONS, the contraction in GDP during the first quarter of this year alone was 2.4%, compared with previous estimates of 1.9%, representing the biggest one-quarter fall in 35 years with the 4.9% annual fall the biggest since Government records began.
Interest rates have started to rise with inflation worries on the horizon, and economists have also warned that despite the scale of the recession faced by the UK, the Treasury has little further capacity to borrow more. In such a financial hole, rumours are that the Government will be selling assets including Northern Rock to the highest bidder — and Tesco has been suggested. The Governor of the Bank of England recently also described the scale of Britain’s budget deficit as “truly extraordinary”, and criticised the track record on fiscal policy, adding that the Government needed to have a “slightly greater ambition” to bring borrowing down.
Liam Byrne, Chief Secretary to the Treasury, said the Government would not be revising its growth forecasts:
“There have been some tentative signs that the fall in output is moderating. and I will remain confident but cautious about the prospects for the economy.”
George Osborne, the shadow chancellor, commented:
“We hope the recovery comes as soon as possible, but sadly we now know the recession will be longer and deeper than we had thought. This also means that in the future, unemployment will be higher, and Labour’s debt crisis will be even worse”.
Simon Hayes of Barclays Capital said that “the figures have a direct bearing on future growth” and:
"The recent signs of ‘green shoots’ reflect a rebound from an extraordinarily sharp fall in activity earlier in the year. We continue to be cautious about the medium-term growth outlook, which is likely to be hamstrung by tight credit conditions and the need for fiscal consolidation”.
The real question on everyone’s mind as they look for the green shoots of recovery, is how long and how hard will the path to recovery be – and what tax rises and spending cuts are we going to have to live with.
What we do know is that faced with a dramatic fall in income, both higher taxes and spending cuts are inevitable. But politicians are struggling to be honest, and are desperately trying to find a route though this mess that looses them the fewest votes. It is also unlikely, given the true scale of the problem, that we will be given the true picture or real financial impact on us, from any political party, until after the next election.
With rumours circulating like vultures, there are many opinions as to the kinds of cuts and tax increases we can look forward to; including, according to Vince Cable:
“Among the tax rises will be a 20% VAT rate, introduced immediately after the next election”.
What we in business also know, is that faced with all these kinds of financial challenges on a routine basis, we still have to find opportunities and often the options can seem very limited. So to Gordon Brown and others I say: "Welcome to the world we live in all the time!"