So QE3 here we come. The Bank of England is going to pump another £50 billion into the economy, taking the total amount of extra liquidity since 2009 to £325 billion.

It’s not a surprise, and neither should anybody be shocked that interest rates will remain at 0.5 per cent. Everybody was expecting the Bank to engage in another round of money printing. But will it make any difference?

The measures taken by the Bank of England and the European Central Bank over the past year to ease credit conditions have had little positive effect. The ECB’s programme of reducing the cost of its loans to banks has led to banks borrowing £500 billion from the ECB since the start of the year.

But while the central banks have undoubtedly helped banks improve their balance sheets, these emergency measures are precisely that – emergency. They have done little to help the ailing economic situation. Instead, without lending requirements, the banks have continued their post-credit crunch over-reaction in refusing to lend.

The Bank has rightly argued that the scheme of printing new money and buying government assets with it has helped keep a lid on borrowing costs and inflation. But there is little evidence that banks have passed on the effects to businesses.

In fact, QE has actively hit pensioners’ incomes by depressing annuity rates by up to 25 per cent. What we have, is a situation where extra money worth around 20 per cent of our annual GDP has been printed, yet lending is stagnant as is the UK economy. The stand-off between government, the banks and customers continues.

Stimulating lending is one of the most important tasks in staving off a prolonged double-dip recession. Many businesses are already feeling the pinch, with the likes of clothing-chain Peacocks just the latest high-street shop to close down. Without sustained bank lending, more will have to close their doors.

In fact, Ernst and Young’s Item Club has actually forecast total bank loans to reduce by 2.2 per cent in 2012, with just a marginal improvement of 0.9 per cent in 2013, having increased by an estimated 4.3 per cent in 2011.

The Item Club’s Neil Blake said that 2012 will see:

“The first time there will be an annual contraction in total loans since 2009, when the UK economy was still suffering from the immediate effects of the global financial crisis.”

Rather than rely that enough money will be printed to keep the economic wheels turning, the government or Bank of England should insist that lending targets to small businesses are kept to. There is no excuse for failure, particularly from RBS and Lloyd’s where the taxpayer is the largest shareholder. If necessary, failure to hit the ‘Project Merlin’ targets should result in fines.

Indeed, the reaction of TUC general secretary Brendan Barber to today’s announcement is bang on the money, arguing that the new liquidity must get through to companies if it is to have a positive impact.

Barber commented that:

“More needs to be done to ensure that this latest injection of cash actually reaches the businesses that need it, rather than just gathering dust on banks’ balance sheets. The failure of banks to increase net lending to businesses, despite £275bn of quantitative easing, is holding back growth in the real economy.”

The government and the Bank of England must make sure that the extra liquidity announced today benefits the real economy. There is no value in allowing it to slosh around on the banks’ balance sheets.

See also:

• ConHome: Neuter the Health Bill – Daniel Elton, February 10th, 2012

• The Financial Times comes out against the NHS bill – Alex Hern, February 9th 2012

• Don’t believe the spin – the health reforms are Cameron’s just as much as Lansley’s – Shamik Das, February 8th 2012

• Miliband goes on attack as fight to save the NHS stepped up – Shamik Das, February 6th 2012

• Sign my petition to drop Lansley’s monster – Dr Kailash Chand OBE, November 24th 2011

The UK economy may be back in recession, on the technical definition of two consecutive quarters of declining real GDP. UK Gross Domestic Product contracted by 0.2 per cent in the final quarter of 2011 and many economists think that it will contract again in the first quarter of this year.

The chancellor said the drop in output in the final quarter of 2011 ‘was not entirely unexpected’ and this is true in the sense that economists have been predicting it for the last few months.

But just six months ago, there were very few forecasters expecting the UK to return to recession.

It is convenient for the government to blame the deepening euro zone crisis for this development, and it has probably had some effect on consumer and business confidence, and thus on investment spending and hiring.

But exports have been relatively resilient and weak domestic spending is the main problem. This is due to the squeeze placed on household spending power by higher commodity prices, the increase in VAT and the government’s cuts in public sector employment.

Provisional figures show the UK economy contracted by 0.2 per cent in the final quarter of 2011.

As a result, growth for the full year was 0.9 per cent. Growth over the four quarters to the final quarter of 2011 was 0.8 per cent, though this figure is flattered by comparison with the final quarter of 2010 when output was hit by bad weather in December. Underlying growth over the last four quarters was probably as low as 0.3 per cent.

Various explanations for this poor performance have been put forward and most economists believe some combination of them is to blame. They include: the fact that recoveries from recessions caused by the bursting of asset bubbles tend to be weak, the effect of high food and energy prices on households’ spending power, the euro zone crisis and the speed with which the government is choosing to cut its deficit.

What happens next appears to depend primarily on developments in the eurozone. At best, growth in the UK economy during 2012 will be a little better than in 2011 (i.e. better than 0.3 per cent over the year to the fourth quarter) as lower inflation eases the squeeze on households.

At worst, a deepening of the euro zone crisis could lead to a renewed credit crunch and reversal of recent increases in business confidence, turning what could be a mild recession (if it is a recession at all) into something more serious.

These increases in business confidence – in manufacturing and in the service sector – are intriguing. Despite a collapse in consumer confidence and no let up in the gloom coming out of Europe, they suggest companies have started 2012 in a more optimistic frame of mind. This is certainly not consistent with the notion of the economy being in recession.

1. GDP declined by 0.2 per cent in the fourth quarter: Preliminary figures show real GDP was down 0.2 per cent in the final quarter of 2011. Output of production industries contracted by 1.2 per cent, construction was down 0.5 per cent and service sector output was unchanged.

Few details are available but it is likely that destocking by manufacturing companies was the main factor behind the fall in GDP. Over the last year, excluding the bounce back from last December’s bad weather, growth has been just 0.3 per cent.

2. Retail sales volumes have improved as inflation has eased: The volume of retail sales increased by 1.1 per cent in the final quarter of 2011 (making it unlikely that lower consumer spending was a factor contributing to the fall in GDP), while the value of sales was up 1.7 per cent.

Despite low wage inflation and rising unemployment, households are still willing to increase their spending on the high street and the internet.

The increase in prices – 0.6 per cent – in the final quarter was lower than recent experience, so this extra spending converted into the strongest quarterly growth in sales volumes since the second quarter of 2010.

3. Consumer confidence is at a near record low: Consumer confidence is at near record low levels, reflecting worries about rising unemployment and the euro zone crisis and a deteriorating outlook for the housing market. On previous occasions when confidence has been this low, the economy has been in recession.

4. Business surveys improve in January: Contrasting with the gloom among consumers, business confidence started 2012 on a more buoyant note. The purchasing managers’ survey of manufacturing recorded a jump in confidence, output and new orders in January, lifting the overall index to 52.1, which suggests the sector is expanding again.

The latest CBI monthly survey showed a similar picture. Meanwhile, the service sector index rose to 56.0 – a ten-month high. In the past, confidence around these levels has been consistent with the economy growing at around its trend rate – about 0.6 per cent a quarter.

5. Manufacturing output is weak: Manufacturing output fell by 0.2 per cent in November and was 0.6 per cent lower than a year earlier. The trend in output has been flat to lower for several months. Performance has become mixed across sub-sectors, with output down in seven and up in six over the last year.

6. Modest increase in employment: Employment in the latest three months, to November 2011, was 18,000 higher than in the previous three months and 26,000 higher than a year earlier. However, the number of employees fell by 93,000 over the last year, while the number saying they were self-employed increased by 138,000.

It is not clear whether some of this increase in self-employment represents hidden unemployment. There are also over 1.3 million people working part-time because they cannot find a full-time job.

7. Unemployment reaches 17-year high: On the Labour Force Survey (LFS) measure, unemployment is now 2.68 million – the highest level since the three months ending in August 1994 – and the unemployment rate is 8.4 per cent – the highest since the three months to November 1995.

Over the last quarter unemployment increased by 118,000. The claimant count measure has gone up for ten consecutive months, though in recent months the scale of the increase has been falling and in December it was just 1,200.

8. Price inflation eased to 4.2 per cent: Consumer price inflation fell back from 4.8 per cent in November to 4.2 per cent in December (and from 5.2 per cent to 4.8 per cent on the retail price measure).

There will be a further big fall in January when last year’s increase in VAT drops out of the calculation and cuts energy charges will help push inflation even lower in coming months. By the end of 2012 consumer price inflation could be below its two per cent target rate.

9. Wage inflation stuck close to 2 per cent: Average earnings increased by 1.9 per cent and regular pay was also up 1.9 per cent over the year to the three months ending in November 2011. Regular pay in financial and business services was up 3.5 per cent, while pay in other sectors only increased by around 1.5 per cent.

10. Government borrowing is below last year’s path: In the first nine months of the 2011/12 fiscal year, public sector net borrowing (excluding financial interventions) was £103.3 billion, down from £114.6 billion a year earlier. It appears that borrowing for the whole year is set to come in lower than in 2010/11 despite weak economic growth.

This is the result of discretionary fiscal tightening by the government, but higher price inflation will have helped. The OBR’s latest forecast for borrowing in the full year 2011/12 is £127 billion; this may be undershot.

11. Interest rates remain at 0.5 per cent; QE at £275 billion: The Monetary Policy Committee left interest rates at 0.5 per cent in January and the scale of quantitative easing at £275 billion. With the economy possibly back in recession and inflation now falling, there is speculation that the MPC will increase the scale of quantitative easing, perhaps as soon as at its February meeting.

12. Government bond yields close to historical lows: The 10-year UK government bond yield rose a little in January, but remains not far from 2%. This reflects the poor outlook for growth and the improving outlook for inflation, Bank of England buying of bonds to implement quantitative easing, and the ever-receding prospects of higher interest rates in the UK.

13. Sterling little changed in January: There was little movement in any of the main exchange rates during January.

See also:

• We’re all economists now, part two - Ben Mitchell, February 5th 2012

• We’re all economists now, part one - Ben Mitchell, February 4th 2012

• Look Left – Wonga’s student ‘scam’ comes unstuck - Shamik Das, January 13th 2012

• Economic update – January 2012: Outlook not all bad - Tony Dolphin, January 9th 2012

• “We are spiralling into a prolonged and ghastly depression”: The economy in 2012 - Ann Pettifor, January 6th 2012

Chris Huhne resigned today as energy and climate change secretary to fight charges he transferred speeding points to his then wife Vicky Price in 2003. The Crown Prosecution Service this morning charged both Huhne and Price with perverting the course of justice, a charge the senior Lib Dem MP strenuosly denies.

Huhne said:

“The Crown Prosecution Service’s decision today is deeply regrettable.

“I am innocent of these charges and I intend to fight this in the courts and I am confident that a jury will agree.

“To avoid distraction to either my official duties or my trial defence I am standing down and resigning as energy and climate change secretary.

“I will of course continue to serve my constituents in Eastleigh.”

Responding to the resignation, Friends of the Earth praised Huhne for having ”championed the environment” in a government that had lost its way in meeting David Cameron’s pledge to be “the greenest government ever”, and warned that his successor would have to “stand firm against George Osborne’s anti-green agenda” and make the case for the environment.

FoE director Andy Atkins said:

“Chris Huhne has championed the environment in an administration that’s shown little enthusiasm for keeping David Cameron’s pledge to be the greenest Government ever.

“He should be commended for insisting on tougher climate targets and fighting for a Green Investment Bank - but his department’s incompetent handling of solar cuts has put 29,000 jobs at risk.

“Leaving consumers to compare energy tariffs as a way to tackle soaring bills is woefully inadequate. What we really need is decisive Government action to get us off the hook of expensive fossil fuels and invest in clean British energy instead.

“The new energy secretary must stand firm against George Osborne’s anti-green agenda and make the case that protecting our environment is a way to boost not hinder our economic recovery.”

Meanwhile, commenting on the political fallout from the resignation, the BBC’s political correspondent Vicki Young writes:

The departure of Chris Huhne, the second Lib Dem to be forced out of the cabinet, is a blow for the party. His abrasive style has meant that he’s never enjoyed huge support from his Parliamentary colleagues, but grassroots Lib Dems admire him because they think he’s willing to stand up to the Conservatives.

He vented his anger when he confronted George Osborne about the way the Tories behaved during the referendum on AV. More recently he raised eyebrows at cabinet when he interrupted the prime minister at least twice – Tory MPs won’t be sorry to see him go.

As energy secretary he claimed some policy success when he signed the government up to tough new climate change targets.

He’s forged a positive reputation for much of his work to push the green agenda, often battling resistance from the chancellor whose priority is cutting the deficit.

His cabinet job will need to be filled by another Liberal Democrat. Ed Davey is a likely contender for promotion and his job could go to Norman Lamb, who was unlucky to miss out on a ministerial post when the coalition was formed.

If he is acquitted, no-one’s ruling out an eventual return for Chris Huhne.

Huhne and Price are due to appear in court on February 16th.

See also:

• Tabloid attacks on green movement mean we have to raise our game – Reg Platt, November 29th 2011

• Huhne must do more than talk to help the poor this winter – Charles Samuda, November 17th 2011

• Huhne’s hot air may set back fight for climate consensus – Adam Corner, October 27th 2011

• Huhne’s tough talk on energy companies exactly what we need – Natan Doron, September 20th 2011

• Huhne must heed lessons of US to fulfil “250,000 green jobs” pledge – Clare McNeil, July 24th 2011

• Huhne and Greening are not serving the environment, but undermining it – Dominic Maxwell, June 29th 2011

• Huhne needs to impose competition on the energy ‘market’ – Charles Samuda, June 29th 2011

Economics Nobel Laureate Paul Krugman has attacked the “austerity debacle” taking place in Britain and elsewhere, pointing out the UK is “nowhere close” to regaining ground lost during the recession, with the country doing much worse than it had after the 1930s Depression and 1973, 79 and 90 recessions.

In his latest NY Times column, he notes:

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart [see Chart 1 below] comparing the current slump with past recessions and recoveries.

It turns out that by one important measure – changes in real G.D.P. since the recession began – Britain is doing worse this time than it did during the Great Depression.

Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s – and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

Chart 1:

He goes on to take aim at British economic policy in particular, accusing the coalition of resorting to “ideologically convenient wishful thinking”, and throwing “hard-won knowledge” gleaned over the past 80 years “out the window”, mocking the idea of expansionary fiscal contraction:

Haven’t we learned a lot about economic management over the last 80 years? Yes, we have - but in Britain and elsewhere, the policy elite decided to throw that hard-won knowledge out the window, and rely on ideologically convenient wishful thinking instead.

Britain, in particular, was supposed to be a showcase for “expansionary austerity,” the notion that instead of increasing government spending to fight recessions, you should slash spending instead – and that this would lead to faster economic growth.

“Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.” How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further?

As Krugman concludes:

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist – or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” – could have told you that austerity in the face of depression was a very bad idea.

But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

See also:

• George Osborne is the downgraded chancellor of a deflationary government – William Bain MP, December 8th 2011

• Balls mocks “Panglossian” Osborne over Bullingdon, growth and Boris – Shamik Das, December 7th 2011

• Krugman: Coalition is “bleeding” Britain dry – Alex Hern, December 1st 2011

• Ex-Cabinet Office chief economist: slower cuts are “common sense” – Will Straw, August 25th 2011

• Coalition cuts are deeper and faster than Tea Party’s – Will Straw, August 2nd 2011

New figures out today show that the US economy grew by 0.7 per cent in the last quarter compared to a contraction of 0.2 per cent in the UK. The final figures for 2011 put to bed Treasury spin from the autumn that the UK was doing as well as the US.

On the morning of the last US GDP figures in November, ITN’s Laura Kuenssberg tweeted:

“Treasury sources say UK grown at same rate as US so far in 2011″

As I blogged at the time, this was only true because of the boost to GDP in Q1 caused by the added economic activity following heavy snow at the end of 2010. With full 2011 figures out for both countries, we now know that while the UK grew 0.9 per cent last year, the US grew by 1.7 per cent.

Indeed, while the UK economy has contracted in three of the last five quarters and may already be in a double-dip recession, the US economy has not contracted since the second quarter of 2009.

The US has taken a slower approach to deficit reduction than the UK with cuts only starting to bite in 2013.

And while George Osborne has blamed the eurozone for the latest downturn, research by the House of Commons library has shown that it was only trade that ensured the economy was growing at all in 2011. Surely now it’s time for Osborne to accept the need for a Plan B.

See also:

• Growth revision shows economic recovery is off track - Tony Dolphin, January 9th 2012

• UK growth – bottom of the table, wallowing with the PIGS - Daniel Elton, November 28th 2011

• UK set for among slowest growth in EU - Will Straw, November 11th 2011

• UK growth down as IMF warn deficit reduction should not be at the expense of growth - Shamik Das, October 5th 2011

• No growth? ‘Keep calm and carry on’ says Osborne – Ben Fox, October 4th 2011

Real GDP in the UK fell by 0.2 per cent in the final quarter of 2011 according to figures released today by the Office for National Statistics.

Growth in 2011 as a whole was 0.9 per cent. Growth over the four quarters ending in 2011 Q4 was 0.8 per cent, though this figure is flattered by comparison with the final quarter of 2010, when output was hit by particularly bad weather. Underlying growth over the last four quarters may have been as low as 0.3 per cent.

In the final quarter of 2011 output of production industries fell by 1.2 per cent, probably as a result of large-scale destocking (there are very few details available at this point). Output of construction industries was down 0.5 per cent, while output in the service sector was unchanged.

The recovery from the 2008/09 recession continues to be slow and uneven. Real GDP has increased by 3.5 per cent since the second quarter of 2009. Over comparable periods after the last two recessions, real GDP increased by 7.1 per cent in the 1980s and by 8.8 per cent in the 1990s.

There are various explanations for this poor performance.

First, this is a different type of recession and recovery. Economists have shown that recoveries after recessions that are caused by the bursting of debt and asset bubbles tend to be relatively slow. The present UK experience is adding another case study to their collection.

Second, higher commodity prices during 2011 squeezed households’ spending power and reduced domestic demand growth.

Third, the government’s belief that it could cut its deficit aggressively because the private sector would fill the gap has proved wrong, as the latest employment figures show. While public sector employment fell by 67,000 in the latest quarter (to September), the private sector created only 5,000 net new jobs.

Unsurprisingly, despite the government’s optimism, the more the government talked of austerity, the more reluctant companies have been to step up recruitment or make new investments.

Fourth, the euro zone crisis has also affected business confidence, particularly of exporters. Again, this will have been bad for jobs and bad for investment.

In the short term, as I have been warning for some time, things are unlikely to get much better.

There is some good news: energy firms are bringing down their charges and petrol prices have fallen. This will ease the squeeze on households’ spending power.

But, as the IMF warned only yesterday, when it revised its forecast for growth in the euro zone in 2012 down from +1.1 per cent to -0.5 per cent, the euro zone crisis is an increasing threat to the global economy. Meanwhile, the government is sticking stubbornly to its deficit reduction plans, meaning further cuts in public sector jobs and taking more demand out of the economy.

With public sector austerity at home and a potential crisis in the euro zone on their doorstep, it seems unlikely the private sector will step up its recruitment or investment plans any time soon.

Together, these GDP figures and the short term outlook suggest the UK economy has slipped back into recession. The feared ‘double-dip’ began in the final quarter of 2011.

See also:

• When the private sector collapses for a second time – Cormac Hollingsworth, January 19th 2012

• Manufacturers still fear a double-dip recession in 2012 – Tony Burke, December 23rd 2011

• More grim news: Economists predict UK will be back in recession in 2012 – Alex Hern, December 12th 2011

• Stories from the economy, or: The prospects for young people, and other grim tales – Richard Exell, November 17th 2011

• IMF boss repeats call for Plan B – Will Straw, September 5th 2011

Ed Balls defended Labour’s new direction on the deficit last night, saying he would not make promises he couldn’t keep, stressing the need for pay restraint and insisting Labour could be trusted to make the big decisions.

The shadow chancellor reiterated the line from his Fabian speech on Saturday and Ed Miliband’s comments in a series of interviews yesterday, and also attacked George Osborne’s failure to deal with the deficit and the lack of jobs and growth.

Watch the interview in full:

Balls said:

“We can’t now make commitments on spending, on tax rises, to reverse what the Conservatives are doing, but nor can we say with any credibility, in the next two years, we think that higher pay for public sector workers should come before jobs, we can’t make that argument… I’m afraid there is now no choice, if we’re gonna keep unemployment down in the future, that jobs should come over pay…

“Labour cannot from opposition change that till we’re in government, and to be in government we’ve got to set out an alternative, but it’s got to be a credible alternative… what we’ve got to do is say there is a better way, a fairer way, to get the deficit down, to get the economy moving, to get growth and jobs back, our five-point plan for jobs and growth, tough decisions on pay, but also doing it in a fair way…

“We can’t make our policy on the basis of now, we’ve got to make our policy on what will be the best way forward for the country, and what could show Labour, in a credible way, can make the difficult decisions when we will be faced with clearing up a very difficult Tory economic mess, which we see all around Britain at the moment…

“I am saying today, as I said a year ago and two years ago, the deficit must come down, there have to be hard choices on tax and spend, but if you go too far and too fast, as I warned consistently over the last year-and-a-half, the danger was it wouldn’t work, the economy would flatline, unemployment would go up, and in the autumn statement George Osborne had to admit, not only all that, that he’s borrowing £158bn more.

“The problem I’ve got is that I can’t wave a magic wand, and sort of just blow away that inheritance, our task as Labour will be to clear up George Osborne’s economic mess…”

He was then asked:

“You’re adopting the view that there is no alternative to these cuts?

Replying:

“That is 100 per cent, emphatically, wrong. I think George Osborne should change course now, his cuts are too far and too fast, he’s crushing growth. The reason our interest rates are so low is cos he’s getting it wrong. Unemployment is going up. He should have now as we’ve advocated, a temporary cut in VAT, increased public investment, repeat the bank bonus tax…

“Len McCluskey is plain wrong. I argued for action now to boost growth and jobs, and I argued for long term reform to make our economy stronger and fairer…

“What I can’t do is make a commitment now that I will know how much money we have, when there will be less money in three years’ time…

“George Osborne is doggedly sticking with a plan that is failing, he should have changed course six months ago, he still can today, he still can in the run-up to the budget and I will say to him, day-by-day, week-by-week, the approach he is taking, too far and too fast, is unfair and is not working. The longer he persists, the bigger the pain, the bigger the damage and the greater the damage in inheritance we will face because of his mistakes…

“The VAT rise last year to 20 per cent was an unfair tax rise which choked off the recovery and has flatlined the recovery, will probably lead to, has led to more borrowing in the economy. It was the wrong thing to do, they shouldn’t have done it, we’re calling for a temporary VAT cut now, but can I say to you today and to your viewers, “I promise as shadow chancellor, in three years’ time, we can definitely reverse that”?

“I will not make uncosted commitments I can’t afford until I know the state of the economy…

“As the shadow chancellor, I’ve got to know that our manifesto is being properly costed in the context of the times and can be paid for…

“I think what they’re doing on disability allowance is a big mistake and it’s unfair, the benefits cap will lead to more homelessness the way it’s been designed, I think the abolition of the Future Jobs Fund will make youth unemployment higher, the taking tax credits away from families on £25,000, hitting women harder, is unfair, wrong and damaging, but the question you’re asking me is can I, to your viewers, make promises now, about three years’ time.

“Nick Clegg made promises, remember that promises not to raise VAT, he broke his promises straight after the election. I’m not going to make that mistake cos that is wrong, and not the right way to do politics, I won’t make that mistake.”

Meanwhile, in today’s Guardian, Balls’s predecessor Alan Johnson hits back against the trade union leaders who have criticised the new direction, saying the union movement is at risk of plunging back to the “fantasy utopias” of the 1970s, and calling the likes of Unite general secretary Len McCluskey and GMB boss Paul Kenny the “delusional left”.

He writes:

“McCluskey’s article in the Guardian reminded me of the ‘culture of betrayal’ that I thought the movement had escaped. According to Len, by trying to position Labour as a credible alternative to the coalition, Ed Miliband has set it on a path to ‘destruction’.

“Stuck in a familiar groove, Len goes on to suggest that all the ills that he claims are befalling Labour are because of actions of so called ‘Blairites’ – those terrible people who introduced the minimum wage and increased the number, the stature and indeed the pay of public sector workers across the country.”

Adding:

“Ed has stated a simple fact; that a Labour government will not be able to reverse as many of the cuts the current government is making unless it can show where the money is to come from.

“The difference between Len’s position and Ed’s is that Len believes a political party can win an election on a platform of promising no cuts, no job losses and continued levels of public expenditure. That is the policy of the delusional left who will never again win the public’s trust.”

“The trade union movement lost its way in the late 1970s when it opposed the minimum wage and supported the closed shop. It needs to recognise that Ed Miliband’s vision of a better future requires a change of mindset throughout the party if we’re to spend one term in opposition rather than a decade.”

Miliband is expected to face further scrutiny of his position today from David Cameron and his Tory backbenchers at Prime Minister’s Questions.

See also:

• Memo to Osborne: Jobs and growth will cut the deficit. Please listen – Cormac Hollingsworth, January 17th 2012

• Balls throws down the gauntlet: “We are going to have to keep all these cuts” – Shamik Das, January 14th 2012

• Economic update, December 2011 – UK teeters on brink of recession – Tony Dolphin, December 5th 2011

• Commons to vote today on Labour’s five-point plan for jobs – Shamik Das, October 12th 2011

• Vindicated Balls gives absent Osborne an economics lesson – Shamik Das, September 15th 2011

Rising unemployment and recession are increasing the deficit. In the fiscal year 2011-12 the government’s policy measures of £19 billion have only cut the deficit by £ 9 billion. Ed Balls has been arguing a very simple point that government action to reverse the slump would reduce the deficit.

Here we present Left Foot Forward’s own research that shows Labour’s five-point plan would cut the deficit by £16 billion.

Within a football idiom government spending is equivalent to the decision of the football board on how much to allow the manager to spend on players. And just like a government, the club’s borrowing is only revealed at the end of the season because club revenues are gathered during the course of the year.

Whether the club qualified for a European place, whether it got relegated to a lower division… it’s only then that the club’s borrowing will be revealed.

So perhaps it’s helpful to describe the argument between George Osborne and Mr Balls in this way:

“George Osborne, as chair of the current board, told the club manager at the start of the season ‘there’s no money to be put into buying players for the team, but as a result of this prudence, the club will break even at the end of the season’.

“Unfortunately the lack of investment is now showing, and the club is currently languishing at the bottom of the table, and the pundits are expecting the club to end the season with a balanced book.

“As a result, Ed Balls, another board member, speaks up arguing the club needs to spend in the mid-season transfer window, because good players will allow the club to finish higher in the table.

“‘It’s only through spending in the mid-season transfer window that the club can have the players to perform well enough to break even,’ says Ed Balls (if only Ed Balls could convince the terraces that there was some hope)…” (etc.)

With their football team languishing at the bottom of the league, there are few football fans that don’t want their board to allow the manager to invest in the team.

Fans don’t believe this spending must lead to wasteful borrowing. On the contrary, they believe spending is the best chance the club has of not going bust. So it is with government spending.

While of course Mr Osborne will say Labour’s five-point plan for increasing spending would increase the deficit, that’s because he is not taking into account the effect on growth on decreasing the deficit, which is what we’ve calculated here.

How government spending affects growth is what economists call the multiplier, and the OBR gave us their estimate (in Table C8 below) of what the multipliers are for various policies in the June 2010 commentary.

Tim Harford explains of multipliers:

“If the fiscal multiplier is 0.5, we’re getting the government project for half price: the government draws half its resources away from private sector activity but other half is just soaking up the slack.”

Table C8:

How growth affects borrowing is a little harder, however we’ve been drawing graphs for the past six months. Left Foot Forward, illustrating how growth and borrowing interact (as revealed by the OBR’s Treasury model), and the slope of that relationship between the two gives us the effect. It turns out that an increase in growth of 1.5 percentage points decreases borrowing by 1 percentage point.

Labour’s five-point plan has two large expenditure items, a VAT cut and infrastructure expenditure. The IPPR thinks it’s possible for the UK government to spend £10 billion on infrastructure, so this is the number we’ve used. The VAT cut is estimated to cost £12bn.  he spending cost of these policies is therefore £22bn.

However by the end of the parliament, GDP will be four percentage points higher, and unemployment two percentage points lower (Okun’s law) and together increases receipts and reduces welfare spending by £38 billion. Putting these together, spending £22 billion reduces borrowing by £16 billion.

Within our core simulation, the effect of the stimulus from Labour’s five-point plan is only to increase 2012 growth (by 0.7% we calculated above to 1.4%) and then this stimulus guarantees the OBR’s forecasted growth is achieved for 2013, and 2014.

In particular, the merit of the VAT cut, while having a much lower multiplier effect on growth is that, as it did in 2008/9, it puts desperately needed cash in the hands of small businesses so they don’t go bust.

However, as we saw with the ITEM-club downgrade to growth yesterday, if the economy continues on the austerity policy without a stimulus for the rest of 2012 we can’t avoid a second dip, and so our austerity forecast is to follow Standard Chartered’s growth prediction for 2012 of a recessionary -1.3%, and the shock means growth in 2013 and 2014 is reduced to the lowest forecasts for growth over the life of this parliament from the Treasury collection of economic forecasts.

The two forecasts are shown in Chart 1 below and the OBR’s current forecast is shown for comparison.

Chart 1:

Labour’s five-point plan should be implemented in 2012 because UK output would be four percentage points higher in 2015, which lowers unemployment by two percentage points, but most importantly lowers borrowing by £16 billion.

So the next time a Liberal Democrat tells you Ed Balls would increase spending by £22 billion, you can calmly look them in the eye and say “yes, and it would also cut the deficit by £16 billion”.

See also:

• Balls throws down the gauntlet: “We are going to have to keep all these cuts” – Shamik Das, January 14th 2012

• Growth revision shows economic recovery is off track – Tony Dolphin, January 9th 2012

• “We are spiralling into a prolonged and ghastly depression”: The economy in 2012 – Ann Pettifor, January 6th 2012

• Commons to vote today on Labour’s five-point plan for jobs – Shamik Das, October 12th 2011

• Growth cut the 2010-11 deficit as fast as cuts – Cormac Hollingsworth, September 22nd 2011

Ed Miliband will today warn that only Labour can deliver fairness in these straitened times, and that whoever wins the next election will have to deal with a big deficit. In a speech to London Citizens on the South Bank this morning, Miliband will say that, if the winners are Labour, the party will have to govern in a different way to the last time it was in power.

On the challenges of governing under the specter of the deficit, he will say:

“We live in tough times. In the years ahead there will be less money to spend. It’s a challenge for Labour. It’s the same challenge facing parties on the centre-left all around the world. And it’s a challenge for me. A challenge I relish.

“We always said the deficit had to be reduced. But in a steady and balanced way. And we warned that trying to cut spending and raise taxes too far and too fast would make it harder to get that deficit down. The government has proved that prediction was correct in just 18 months.

“But the failure of George Osborne’s economic policy creates a different landscape for the 2015 General Election and whoever wins it…

“Whoever is the next prime minister will not have money to spend. We will have to make difficult choices that all of us wish we did not have to make. Labour knows what fairness means. It always will. But we must rethink how we achieve it for Britain.

“The ideas which won three elections between 1997 and 2005 won’t be the ideas which will win the election in 2015. So we will be a different party from the one we were in the past. A changed Labour Party.”

Following his attack last November that fairness “is not in David Cameron’s DNA”, Miliband will say the prime minsiter will only offer “more of the same” in answer to the country’s problems:

“Everyone is now joining us talking about the squeezed middle, the next generation and responsible capitalism.

“But it’s not enough just to talk about them. Suddenly David Cameron is falling over himself to say he too is burning with passion to take on ‘crony capitalism’. Now he has accepted this the battleground of politics, I say: ‘Bring it on.’

“The core belief of David Cameron is that we can solve the problems Britain faces by government getting out of the way. His answer to the problems thrown up by an economic crisis caused by faith in free market fundamentalism, is simply more of the same.

“My answer is different. Different to this prime minister. And different too to the previous Labour government.”

In describing the “new reality” as “an opportunity for Labour to achieve more, not less”, he will outline how a future Labour government will deliver fairness:

“I want to explain the principles which will guide the Labour Party under my leadership so that we can rise to the challenge of those who say that Labour is only a party for good times.

“I want to talk about three new ways of delivering fairness in difficult times when there is not much money around.

“First, reforming our economy so we have long-term wealth creation with rewards fairly shared. Second, tackling vested interests that squeeze the living standards of families across our country. Third, making choices that favour the hard working majority.”

Polly Toynbee, writing in today’s Guardian, says of the Labour leader:

Miliband is adopting all the High Pay Commission’s proposals. If Cameron’s plan fails to curb excess, Miliband must go further. He should certainly support those dangerous lefties, Merkel and Sarkozy, on the Robin Hood transaction tax: watching them go it alone shows how wrong Cameron was to claim this was an EU conspiracy against the City.

Hard times need create no “crisis of social democracy”. In Attlee’s postwar days of atrocious austerity, Labour produced its best policies – and so Miliband lays out reasons why fairness matters most when money is short. His “responsible capitalism” may look ever more essential by the end of this economically threatening year.

Adding:

There is nothing anti-business about cleansing cheats, asset-strippers and vultures from honest savings and good business enterprise: Cameron has been forced to agree.

Miliband has forced this onto the agenda; he needs to keep running with it and make this ground his own.

See also:

• Miliband attacks Osborne’s “dangerous gamble” and “catastrophic mistakes” on economy – Shamik Das, November 24th 2011

• Slowly but surely, Ed’s speeches are getting better – Asher Dresner, September 28th 2011

• Miliband needs to move the argument beyond mere Tory-bashing – Ed Jacobs, September 27th 2011

• Leading Labour: Evaluating Ed Miliband’s first year – Marc Stears, September 24th 2011

• Miliband: “Our ambition is to be more than a party; Labour must be a cause” – Shamik Das, June 25th 2011

There’s not going to be much christmas cheer in number 11 today, as the OECD has cut its growth prediction for the UK for the eighth month running.

This follows the news yesterday that economists at the bank Standard Chartered were prediction a contraction of 1.3 per cent of GDP in the first half of 2012, and comes on the same day that the ratings agency Fitch downgraded UK forecasts from 1.2 per cent growth to just 0.7 per cent.

Rather than making concrete predictions about the magnitude of growth, the OECD uses an index of “composite leading indicators” (CLI), which tend to exhibit trends around six months in advance of the economy moving in the same direction.

A CLI of over 100 implies that growth will rise above the long-term trend, and under 100 means that it will drop below. The further above or below 100 it is, the surer that rise or fall is to happen. Since the long-term trend is itself so low, there’s not far for growth to drop before it becomes contraction, and the numbers aren’t looking so good.

The OECD area as a whole has a CLI of 100.1, and the eurozone is on 98.5. Alarmingly, the UK is just a tenth of a point above the eurozone indicator, at 98.6, which implies that our fiscal isolation hasn’t kept us much safer that the extremely exposed economies of France (98.1) and Germany (98.3).

The compilation of the OECD’s figures is likely too early to fully take into account the effects of Cameron’s not-quite-veto on Friday. For that, we shall have to wait until the release of the January index.

As we reported yesterday, any further cut in predicted growth will have large ramifications.

Even the official figures, which still predict some growth, were bad enough to require an admission in the autumn statement that the deficit would not be cut in the lifetime of this parliament.

Under the 2010 OBR projection, the deficit would have shrunk to £37 billion by 2014/15, but by the 2011 projection, it will still be £79 billion – and this is a projection which still assumes uninterrupted growth, rising to almost three per cent by 2014.

If the UK really does go back into recession between now and then, and if it does stagnate as much as is predicted in the aftermath, the prudence of deficit reduction as a primary aim may have to be called into question.

The one piece of good economic news today is that the rate of inflation appears to be falling from its highs in October, as Tony Dolphin reports below. As christmas presents go, however, Osborne may be feeling hard done by.

See also:

• Inflation starts to head lower (probably) – Tony Dolphin, December 13th 2011

• OBR confirm Osborne will borrow more than the Darling projection – Daniel Elton, November 29th 2011

• Whatever Osborne’s growth forecasts today, the reality is probably worse – Daniel Elton, November 29th 2011

• Inflation report is bad news for Osborne’s targets – Tony Dolphin, October 18th 2011

• Cameron’s “failed experiment” leads to yet another economic downgrade – Alex Hern, October 17th 2011