Fresh splits have emerged in the coalition, with Liberal Democrat Business Secretary Vince Cable calling for his government to rethink the direction of its economic policy.
GDP figures yesterday showed the economy shrank for the third quarter in a row – down 0.7 per cent between April and June – meaning the UK is in its worst recession since 1955.
But as Conservative Chancellor George Osborne and Prime Minister David Cameron insisted yesterday there was no need for a change from their austerity policy, Mr Cable demanded what he termed a “Plan A-plus” to help boost growth in the UK.
Business leaders also called for a rethink, criticising the government’s lack of growth policies..
The divide in the coalition was underlined as another senior Lib Dem – Lord Oakshott – described Mr Osborne as a “work-experience Chancellor”, blaming him for the failure to turn around the economy.
Mr Cable distanced himself from his friend Lord Oakshott’s remarks, but said there needed to be a new strategy, admitting more had to be done to boost growth through a “Plan A-plus”.
He described the choice between cutting the deficit or promoting growth as “a false dichotomy”, insisting both were needed, but made it clear he wanted to see the government come forward with further measures to boost growth.
He said: “We also need policies to stimulate long-term growth, which is the kind of things the government has produced over the last few days, with the funding-for-lending scheme which is designed to inject some life into the banking system, and the policies for supporting major infrastructure projects.
“That’s building on a lot of things that have already happened, and there will have to be more.
“But that is the package, that is the overall structure of what we are trying to achieve.”
Dire construction and manufacturing output drove the biggest drop in GDP since the height of the financial crisis three years ago, alarming forecasters who had expected a much smaller 0.2 per cent fall.
Yesterday’s figures showed the UK is now mired in the longest double-dip recession since quarterly records began in 1955 – and possibly since the Second World War.
An extra bank holiday for the Queen’s Diamond Jubilee and record rainfall played a significant part in the biggest slump, according to the Office for National Statistics (ONS).
Yesterday however, Mr Osborne blamed the figures on the eurozone crisis and world downturn, saying he did not see any need for a Plan B.
The Chancellor said he could not use the Jubilee as an excuse and said the “disappointing” figures highlighted the UK’s “deep-rooted economic problems”.
He added: “Given what’s happening in the world, we need a relentless focus on the economy and recent announcements on infrastructure and lending show that’s exactly what we’re doing.”
Mr Cameron came to the Chancellor’s aid, insisting the government would not divert from its strategy.
He said: “It’s vitally important we redouble all our efforts to get on top of our debts, deal with our deficit, get our economy moving.”
Last night some of the harshest criticism came from business leaders and senior economists, who argued the government needed a change of strategy. British Chambers of Commerce director general John Longworth said: “It is clear that Britain is in the midst of the most prolonged period of stagnation it has faced in decades.
“Ministers can’t expect firms to bust a gut to grow if they fail to take a long-term approach to creating an enterprise-friendly environment.”
The Institute of Directors said: “Too often, programmes are moving ahead at glacial speed. To help unlock corporate cash piles, government needs to show decisive leadership and a real sense of purpose.”
However, CBI director-general John Cridland offered some hope.
He said: “These are very disappointing figures. They show there has been a lack of growth in the first half of 2012.
“When I talk to businesses, the overwhelming view is that the economy is flat rather than negative, and there is potential for Britain to get back into growth later in the year.”
Labour last night called for a government of national unity to solve the economic crisis. In a TV interview, shadow chancellor Ed Balls said the three parties should work together to get the UK out of recession. He said: “I would like to have a consensus on the way forward.”
Asked whether he would like to see a grand coalition, Mr Balls said: “Yes, that is exactly what we should do.
“We would be putting the economy and long-term interests first.”