Analysis: Saving and spending should balance

While the economy experienced extended decent growth over the decade before the recession, some of this was financed by people spending beyond their means. This is clearly unsustainable.

If you live beyond your means for an extended period, it creates serious problems - people borrow money they can't pay back, businesses go bankrupt. However there is another side to this, which is that a lot of economic growth is fuelled by consumer spending. If people start repaying debts and saving too much, it will slow down economic growth. If you start getting scared about the effect the fiscal slowdown is going to have on the economy and perhaps on your job, you start behaving cautiously and saving rather than spending - and that can make things worse.

Ideally you want people to save a reasonable amount and to spend a reasonable amount.

What the government needs is for the private sector to grow faster and make up the difference as the public sector is cut back. But the fiscal squeeze will hit jobs and impact on purchasing power (such as through the VAT hike in January), which is hardly supportive for spending.

If UK consumer spending is fuelled by debt, then things can only go on for so long before there's trouble - people spend money they don't have.

• Howard Archer is chief UK and European economist at IHS Global Insight