It was inevitable that times would get more difficult. The UK economy has to completely re-balance as well as reduce the budget deficit. That is two major undertakings at the same time. The Eurozone is struggling to contain its sovereign debt crisis. Up to three countries are on the potential debt re-structure list, which means default in plain language. That will mean big new losses for fragile banks, not all of which will be able to cope.
Now the OECD warns that UK growth will be slower than forecast. Ominously it also warns that the pace of cuts may have to slow to take account of slower growth in the short term. That in turn would mean borrowing more; already the interest bill each month is impacting on the deficit and making it wider.
There is a fine line between having to borrow more to maintain economic activity, which in turn boosts revenue, or cutting fast which reduces revenue but also reduces borrowing. If the line is breached it is possible to cut more and borrow more at the same time. That is and always has been, Labour’s message. The trouble is that this line is so fine that even the best economic minds do not know where it is. So you can end up cutting less and borrowing more until debt levels become unsustainable, or conversely cut too much and end up in the same place.
However there is a difference for the UK. Our economic model was shot and the state was too big. If we ended up in the bad place but with a better shaped economy we could cope. To get there with the old dysfunctional economy would be economic curtains. Osborne therefore needs to stay the course. If he comes under irresistible pressure to ease back on cuts, he should borrow to build schools and roads, not another cathedral of quangos. Let us hope it will not come to that.
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