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Growth slowdown bad news for Tories

Not a Happy New Year for Osborne – a steady trickle of bad economic news is testing even quicker than expected whether his strategy can survive . Even before the big ticket cuts kick in and VAT at 20% went live at midnight, costing an extra £389 a year to the average family, three bits of unwelcome news have already hit the Government in the last week.   First was the unexpected increase in inflation, then unemployment rose over 2.5 million, and now the revelation which has stunned the City – that Government borrowing, which Osborne’s draconian austerity was supposed to be reducing, had hit the highest level for a single month since modern records began in 1993.   It is hard to exaggerate how bad this news is for the Government.

The previous worst monthly record in November 2009 put Britain in the red by £17.4bn; this time it’s a third higher at a deficit of £23.3bn.   Two things illustrate the significance of this.   One is that it follows two quarters of robust economic growth during April-September 2010 which would have been expected to lower net borrowing.   Instead for the period April-November 2010 net borrowing still stood at £104.4bn, virtually unchanged from the £105.1bn during the same period of the previous year.

The second point is even more disturbing.   If the trend displayed so far continues (and is not the freak the Treasury is hoping it is), then the deficit will finish up at the end of the current financial year at £155bn, £7bn higher than the OBR predictions.   What this means is that after inflicting unprecedented spending cuts on the public, with all the civil and political unrest this will unleash, the Government in terms of the object of the whole exercise – cutting the deficit – will be back to where it started, or worse.

This is reinforced by the marking down of predictions of economic growth for this year, from 2.1% (OBR) to 1.9% (City economists) to 1.7% (OECD) – all of which growth rates are too low to prevent unemployment rising, with the costs of that unemployment now reported today by the Treasury to be £1.5bn higher than expected.   Beyond that there will be severe fiscal squeeze throught 2011, the VAT hike, Eurozone turmoil damaging export prospects, and a very uncertain outlook for the world economy.   He’ll never admit it of course in public, but Osborne must be a worried man.

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