UK economy has been going nowhere under Osborne - The Guardian

Two years have passed since George Osborne was preparing his first budget, and much has changed since the heady first days of the coalition.

In June 2010, the chancellor was expecting growth of 2.3% in 2011. In the event, it was 0.7%. Activity was supposed to accelerate to 2.8% in 2012, but the current consensus is for growth of 0.5%. This is a woeful performance, and it is the real message from the revised GDP figures.

To be sure, the data looks curious. The idea that the economy contracted by 0.3% in the first three months of the year hardly squares with business surveys or the unemployment figures. The report from the ONS shows that government spending added to growth, which fits oddly with the toughest austerity programme since Jim Callaghan called in the IMF in 1976.

But there's a danger here of failing to see the wood for the trees. Whether the UK grew a bit or contracted a bit in early 2012, the big picture is of an economy that has moved sideways (at best) for 18 months when it should have been eating up the ground lost during 2008 and 2009.

Three questions arise from this under-performance: what caused it, what happens next, and what can be done about it? The answer to the first is that the UK is a deeply dysfunctional economy that has allowed its productive base to shrivel, is deficient in skills and infrastructure, and has papered over the cracks for decades by squandering North Sea revenues and borrowing excessively.

The immediate future looks grim. Europe's death spiral, the squeeze on real incomes, the unwillingness of companies to invest and the likelihood that spending cuts will soon start to show up in the GDP figures means that there may be a further two quarters of negative growth this year punctuated by a transitory period of rapid expansion during the Olympics.

As to what can be done, in the short term policy is likely to be eased by the Bank of England. In the medium term there may be higher (and much needed) infrastructure spending. In the long term, though, there is no escaping the need for a fundamental re-casting of the economy so that Britain can once again pay its way in the world.