Cameron under pressure as cuts begin to bite
Cameron’s refusal to compromise on the pace of cuts is straining a recovery facing headwinds that Bank of England governor Mervyn King said are growing “by the day”.
As he presses ahead with reductions to welfare benefits and state jobs, accelerating inflation is squeezing incomes and growth is slowing across the world amid Europe’s intensifying debt crisis.
An index of retail sales in August fell to its lowest level since the Conservative-led coalition took office in May 2010 and consumer confidence declined for a second month in July.
Cameron has staked his reputation on carrying out the deepest budget cuts since the Second World War, after inheriting a budget deficit of 11% of economic output.
“It’s putting a lot more pressure on them to rethink and come up with some new ideas,” said Chris Williamson, the London-based chief economist at Markit. “In the environment at the moment, where more countries are implementing austerity measures, we’re going to have to do more to stimulate growth.”
Questions are mounting among Cameron’s political allies. London mayor Boris Johnson, a Conservative, said the government should review police cuts.
Johnson is also among Tories demanding the abolition of the top 50% income-tax rate to boost spending and encourage companies to locate in Britain.
“Stimulating the engines of economic growth is the real key to helping the British economy back on the road to recovery,” Conservative lawmaker Mark Field wrote on his website. “I fear that this will be too difficult a pill for the coalition to swallow as it requires harsher spending reductions to pay for it.”
Labour, the main opposition party, wants a rollback in the sales-tax increase to 20% from 17.5% that took effect in January, as well as a slower pace of deficit reduction.
Cameron’s five-year plan, made up of £80 billion (€91.5bn) in spending and welfare cuts, and £30bn in tax increases, is aimed at eradicating the bulk of the deficit by 2015.
Departments will see their budgets reduced every year — no postwar British government has managed more than two — and more than 300,000 government-funded jobs are to go.
Cameron argues the plan has made Britain a haven from the debt crisis engulfing the eurozone and that it is also protecting its top credit rating after Standard & Poor’s downgraded the US this month. Critics say the cuts will prove self-defeating by hampering the growth required to narrow the deficit.
“We need a balanced deficit-reduction plan which understands that without people in work paying taxes, and with more people on benefits and out of work, it’s harder to get the deficit down,” said Chris Leslie, a Labour lawmaker.
Growth slowed to 0.2% in the second quarter, leaving output barely higher than in the third quarter of last year.
While production was hit by an extra public holiday in April to mark the royal wedding and supply disruptions caused by the earthquake in Japan, recent data suggests underlying activity is weakening in Britain.
British unemployment claims climbed the most in more than two years in July and sales of clothing and household goods also dropped.
Credit Suisse yesterday lowered its forecasts for 2011 and 2012, saying the British economy will expand 1% this year instead of the 1.5% previously thought.
Williamson at Markit says a double-dip recession is “a real possibility” if confidence continues to weaken.
“It’s hard to see where demand is going to come from in the next few years,” he said.
