Hasty action 'risks double dip recession'

Published on Saturday 21 November 2009 14:16

CHANCELLOR Alistair Darling has been warned that Britain risks being plunged into a "double dip" recession if the government acts too hastily and harshly in tackling the burgeoning public deficit.

David Kern, chief economist at the British Chamber of Commerce, said he believed having a credible plan was more important than the timing. "If you do it too early and cause a double-dip recession you are going to make things worse," he said.

He made his comments ahead of tomorrow's annual conference of the Confederation of British Industry, whose director-general Richard Lambert last week called for the public deficit to be tackled swiftly and sharply. Kern said he was not criticising the CBI but he believed it was more important at this stage to have "a clear programme" of addressing the deficit.

The government borrowed 11.4 billion in October, the worst deficit for that month since records began in 1993. The current Treasury plan is for a gradual fiscal tightening to reduce public borrowing until 2018. But CBI chief Lambert dismissed the eight-year timeframe for fiscal recovery as "limp". He wants Darling and Prime Minister Gordon Brown to be tougher in bringing the deficit down and take more urgent action.

But Kern said: "We don't think it should start now. We have not seen any recovery yet. If in two years' time the economy is on a good course, fine." He acknowledged the deficit endangered Britain's credit rating and that "in an ideal world eight years is a long time". But he said any new tax increases on business could be hurtful to recovery, and any government spending cuts that hit Britain's infrastructure could also be damaging. "If they (the government] hit business they will destroy growth. Only business can get us out of this recession," Kern added.

Other economists have warned that rapid exit strategies from monetary and fiscal easing will undermine recovery and cause a double dip, or W-shaped, recession.

Kern said the BCC believed one area the government could move on quickly to cut the deficit was a freeze on public sector pay. "Such a freeze they could do straight away. Inflation is very low, and there's evidence that wage increases in the public sector are much higher than the private sector."

Many economists agree with the CBI. David Tinsley at nabCapital said the city did not want to see the deficit lead to Britain losing its AAA credit rating "as that makes borrowing more expensive".