Investment remains on hold as the outlook for the global economy worsens and national debt rises, writes Phillip Inman and Larry Elliott.
The United Kingdom is likely to have another five years of economic struggle while recovering from the financial crisis, Bank of England governor Sir Mervyn King told MPs this week.
King said a sharp deterioration in the outlook for the global economy had worsened the UK’s prospects of recovery and persuaded him last month that the bank had to pump an extra £50-billion into the economy.
“When this crisis began in 2007, most people did not believe we would still be right in the thick of it quite this late. I don’t think we’re yet halfway through … my estimate of how long it will take to recover is expanding all the time.”
King, who spoke after official figures revealed that Britain’s public finances had deteriorated in May, told the House of Commons treasury select committee that the spillover from the eurozone crisis to Asia and the United States had forced him to reconsider his view.
“What has particularly concerned me in the last several months – why I have voted for more easing policy – was my concern about the worsening I see in the position in Asia and other emerging markets. And my colleagues in the US are more concerned than they were at the beginning of the year about what is happening to the US economy.”
King said the lack of decisions in Brussels and the subsequent drag on global growth could persuade businesses to postpone investment and push Britain into a downward spiral.
The UK’s economy slipped into its second recession at the beginning of the year and fears of a longer slump have been rising as companies hold back investment and exports suffer from the eurozone crisis.
“We are in the middle of a deep crisis with enormous challenges to put our own banking system right and challenges for the rest of the world that they are struggling with,” King told MPs. “In the last six weeks … I am very struck by how much has changed since we produced our May inflation report.
“I am pessimistic. I am particularly concerned because, over two years now, we have seen the situation in the euro area get worse and the problem being pushed down the road.”
The central bank’s monetary policy committee voted five to four against increasing the current £325-billion of quantitative easing at its last meeting. King joined external members David Miles and Adam Posen and Bank of England colleague Paul Fisher in voting for more quantitative easing, but was outvoted by two deputy governors, Charles Bean and Paul Tucker, the bank’s chief economist Spencer Dale, and external members Ben Broadbent and Martin Weale.
The pressure on the government to increase spending directly has been growing, but an unexpected increase in borrowing in May highlighted the constraints on the government.
Figures from the Office for National Statistics showed that net borrowing, excluding financial help to Britain’s banks, stood at almost £18-billion in May, up from just above £15-billion in the same month in 2011.
City analysts had been expecting net borrowing to come in at about £14.5-billion in May, but the statistics agency said income tax receipts were down more than 7% on May 2011, whereas government spending was up by 8%.
Deteriorating public finances is a setback for the chancellor, George Osborne, who has announced tax increases and spending cuts in an attempt to trim Britain’s record peacetime budget deficit. Rachel Reeves, the opposition Labour Party spokesperson on treasury affairs, said the latest borrowing figures were “another nail in the coffin” of Prime Minister David Cameron and Osborne’s economic plan and that the government’s pledge to balance the books by 2015 “is now in tatters”.
But a treasury spokesman said: “It is too early in the financial year to draw conclusions about the year as a whole, especially because today’s public finances data include a number of one-off factors and temporary distortions.”
The agency said that, in the first two months of the 2012-2013 financial year, net borrowing would have been £4-billion higher had it not been for the one-off windfall for the treasury from the transfer of £28-billion of assets from the Post Office pension fund.
In a further blow to the chancellor, the agency said changes to the way it calculated the public finances had resulted in the deficit for 2011-2012 being revised upward by £3.2-billion to £127.6-billion. – © Guardian News & Media 2012