Sir Mervyn King says recovery will be ‘long, arduous but ultimately successful’

BRITAIN’S recovery will be “arduous, long and uneven” as the government, businesses and households undergo the necessary pain of paying off debt, the governor of the Bank of England warned last night, after figures showed public sector debt topped £1 trillion for the first time.

Sir Mervyn King’s bleak comments came after the Office for National Statistics revealed UK government debt reached a fresh high of 64.2 per cent of GDP in December – not including the cost of bailing out the banks and other financial interventions – although Chancellor George Osborne has succeeded in drastically cutting borrowing over the past year.

King blamed the debt reduction as one of the reasons behind last year’s weak growth although he said it was a vital part of getting the economy back on to a stable footing after businesses, the public sector and households spent “excessively” in the run-up to the financial crisis.

He said 2012 would not be an easy year but assured that, once the recovery is secured, Britain’s economy will be on a more stable footing “than at any point in the past 15 years”.

Business leaders yesterday urged the Chancellor to continue with his timetable of deficit reduction despite the weak economic growth and unemployment running at a 15-year high.

David Kern, chief economist at the British Chambers of Commerce, said other tools such as further quantitative easing should be employed to stimulate the economy. “Given the challenges facing the economy, both domestically and internationally, we believe the fiscal strategy is still on course, and the government should persevere with cutting the structural deficit,” Kern said.

“But with the ongoing debt crisis in Europe and increases in UK unemployment, priorities should be reallocated. This will help businesses create jobs, invest and export.”

Despite the stark headline figure from yesterday’s public sector debt update, economists pointed to some encouraging signs – in particular the fact that net borrowing stood at £13.7 billion in December, an 18.5 per cent reduction on the same month in 2010.

Daniel Solomon, economist at the Centre for Economics and Business Research, said: “Cumulative net public sector borrowing for the financial year to December has been declining since 2009-10. This is a consistent sign of improvement in the public finances.”

However, he warned that deficit reduction was proceeding more slowly than planned and the Office for Budget Responsibility’s projections were “still overly bullish”.

King said there were three factors casting a shadow over Britain this year: continued tight credit conditions, households curtailing spending and upping their savings and the “dark clouds” hanging over the global economy, including the eurozone crisis.

“Starting from a position of excessively leveraged balance sheets, the path of recovery is likely to be arduous, long and uneven,” King said during a speech in Brighton.

But he added: “Helped by the right policy actions, the UK and world economies can and will recover. And when they do so, they will be on a more sustainable footing than at any point in the past 15 years.”