World Economy

UK Growth Under Threat

UK Growth Under ThreatUK Growth Under Threat

On 6th January, Britain’s Chancellor of the Exchequer George Osborne made a speech emphasizing the threats to the UK economy in the coming year.

His emphasis on the weakness of the economic situation might have come as a surprise to anyone who had listened to his autumn statement, where he was keen to trumpet how well the economy is doing. The spin Thursday was all about the impact of the global economy on Britain, Yahoo reported.

The biggest threat to the UK economy at the moment is not inflation, but deflation. Deflation means that any debt held by individuals or companies increases in value rather than decreasing over time. As a result deflation discourages spending and investment by individuals and companies, particularly the type of long term investment Britain desperately needs.

There are several things Osborne could do which would help to reduce the threat of deflation. The first is to forget his commitment to hold public sector pay to 1% over the next 5 years. Allowing slightly higher pay in the public sector would be a big help in preventing deflation, and would also put money into the pockets of many middle income workers, who would spend it, thus supporting economic growth.

The second thing Osborne should do to help prevent deflation is to raise some taxes.

Finally Osborne needs to relax the rules on council borrowing to allow councils to invest in council housing, as many are keen to do. House building is urgently needed, and councils are keen to take a lead, but the current rules prevent them from acting.