Monday, April 23, 2007

Is the UK Economy skating on thin ice?

I read this report on the BBC's website, and that made me go and look for this report from Ernst and Young Item club.

It makes interesting reading. The BBC headline is: " UK economy 'skating on thin ice'" and covers all the negative aspects of the report. You do have to wonder whether the BBC has decided which way the wind is blowing and wants to make sure it is not going to get a kicking when the Conservatives get back in.

Some key quotes from The Item Club's chief economic adviser Peter Spencer are:
"The bottom line is that we are all living beyond our means."

"Ultimately we are all skating - not to say wobbling - on thin ice,"

"If the Chancellor is forced to borrow so much when the economy's so sweet, what will happen when it turns sour?"
That said there is some good new forecast in the report. For example growth is going to be strong this year, and inflation as measured by the CPI will according to the report fall back to at or near 2%.

The bad news is that this is still funded by massive public and private borrowing, at times of continued economic growth started under Ken Clarke. The problem is that can't go on forever and is very vulnerable to a change in conditions.

Those on the left often accuse me and indeed the Conservative party as a whole of being doom mongers. We are not, we are pointing out the danger. In fact I have been banging on about some key fundamental issues like borrowing for ages. It is not because it guarantees failure but risks it, and risks making it deeper than it would otherwise would have been.

This also shows where the problems are going to be for an incoming Conservative government. (Also for an incoming chancellor as well). The money has been spent, the public sector purse must be tightened, whilst taxes must remain at their current level. The UK current account has not been in this bad a state since 1991, during a recession. So we can't promise tax cuts, we have too fix the public sectors finances first.

However we don't know what sort of country we as a party are going to inherit. The next labour chancellor is going to have to squeeze the public sector, and having raised expectations that is going to cause problems for them. As ken Clarke says, Labour chancellors always run out of money.

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