Articles - The Chancellor’s difficult balancing act

Comment on the Autumn Statement from F&C Investments

 The Chancellor is still rigidly sticking to ‘Plan A' aimed at reducing the UK's huge fiscal deficit, despite the deteriorating prospects for the economy which the government's austerity measures have exacerbated.The tightrope that the coalition government has been forced to walk leaves little fiscal room for manoeuvre, as was evident in today's announcement. On the one hand the threat of recession and rising unemployment calls for a loosening of fiscal policy but, if this were conceded, there would be a risk that the UK's credit rating would be downgraded, resulting in much higher borrowing costs for the government. The Chancellor has always maintained that the government places a high priority on avoiding such a predicament.

 Mr Osborne was correct to claim some success for undershooting the 2010/11 fiscal deficit target. However, this has been achieved through swingeing cuts in government spending despite tax revenues being lower than expected. At the same time the prospects for economic growth have fallen sharply, as lower tax receipts suggest. The OBR has downgraded its GDP expectations for 2012 from an optimistic 2.5% to 0.7%; with the formidable headwinds of the Eurozone debt crisis and private sector de-leveraging to contend with, there is a real chance of a double dip recession next year.

 To counter the slower growth prospects, the Chancellor has announced some targeted policies especially towards small and medium-sized businesses. The objective of measures such as the new infrastructure projects and the credit easing scheme (guaranteed loans to small businesses) is partly to restore the movement of credit in the economy, the lack of which is acting as a constraint on growth. Their direct impact, however, will be limited in the context of a slowing economy with high and rising unemployment.

 The government will be hoping that the Eurozone, as the UK's largest trading partner, achieves a sustainable resolution to its debt crisis soon so that it will reverse its recent spiral towards seemingly inevitable recession. Also, an improvement in confidence could persuade businesses and consumers to save less and spend more to help revive the economy. Without such good fortune, the Chancellor may be forced to think hard about a Plan B to forestall a recession of our own.

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