Wednesday 8 June 2011

Britain's 'Plan A' for the economy



The Government should "proceed as planned" with its "ambitious measures to reduce the deficit", the European Commission said.

The instruction is a second endorsement of the Coalition's "Plan A", after the International Monetary Fund on Monday said the UK should plough on with its austerity efforts despite growth turning out weaker than expected.

The Government is aiming to eliminate the structural element of its annual borrowing – the shortfall which remains even when the economy is running at full pelt – by 2015, through a £110bn package of cuts and tax rises.


The debate over whether it should change course to protect growth – possibly scaling back the £81bn of cuts planned over four years – reignited at the weekend after some 50 academics signed a letter calling for the urgent adoption of an alternative economic strategy, or "Plan B".

The Commission, the EU's executive body, did not share that view. "Ensuring no slippage from published spending plans will be vital to re-establishing a sustainable fiscal position," it said.

It cutioned that carrying out the planned fiscal consolidation remains a "major challenge". The official growth forecast of 2.5pc for 2012 was questioned as "slightly too favourable," owing to a more optimistic view of prospects for consumption and investment than Brussels holds.

The green light to keep cutting came among the first of what will be yearly instructions to EU nations as part of efforts to bring more oversight to the region's members.

The recommendation that the Government stick to spending plans did, however, come with the caveat that spending that is "growth-enhancing" be prioritised.

The Commission flagged up the UK's "historically low" levels of public investment in its infrastructure, particularly the transport system. Its report also said the Government should do more to tackle youth unemployment, reform the housing market and boost the availability of lending to businesses.

The UK needs a plan to reduce the numbers of people leaving school early, to help tackle youth unemployment and the related issue of skill shortages, Brussels believes.

The Commission is also worried by the number of children living in homes where no one has job. More than 17pc of the UK's jobless households have children, the highest proportion in Europe.

Britain should improve the supply of childcare to help cut the number of workless households, said the report, which also highlighted a lack of financial incentives to encourage people to move off benefits and into work.

The UK's housing market was viewed as a long-standing source of problems. The Commission was doubtful that efforts to increase new building are on track and saw a "lack of evidence" of a strategy cutting across both the demand and supply sides of the UK's housing issues.

While the Commission thought the Government has begun to tackle the issue of smaller businesses struggling to access finance, it warned the interventions were "mainly short-term in nature".

It suggested a more sustainable solution could include increasing competition in the banking sector and improving access to non-bank financing.

The Commission also warned Spain and France that they are too optimistic about growth. The recommendations will be finalised by leaders later this month.