SW economist issues spending cuts warning

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The UK economy risks being pushed back into recession if the next Government cuts public spending too much or too soon, warns one of the south west’s leading economists.

The winners of the next General Election should wait until the economy is sure of a robust recovery before implementing an inevitable and necessary tightening of fiscal policy, writes Nigel Jump, chief Economist for the South West Regional Development Agency in its Quarterly Economics Review to November 2009.

The report says that, with the world’s economy having come out of recession, fears about the UK economy have also eased, however it remains in “intensive care”. In the south west, it is unlikely the region’s economy can return to pre-recession ways any time soon but there are reasons to be optimistic about the future, providing the region can diversify its economy and adapt to a shrinking public sector.

Writing in the report, Nigel Jump said there is no doubt that the UK’s fiscal affairs are “in a mess” and that the projected budget deficit is unsustainable – but he warns, “we have to make sure the patient will survive” before implementing a “necessary regime of strict fiscal control”.

He added: “Tightening too early or too vigorously could halt the recovery and plunge us back into recession; resulting in a ‘double dip’ in output.”

Latest figures for the South West offer some reasons for muted optimism.

• The Purchasing Managers Index (PMI) for the region shows that the South West economy has been operating better than the UK average since May 2009.

• The South West housing market showed a bit more life during the summer, with average prices rising modestly in several places.

• Manufacturers’ activity rates are also not as depressed as they were, although construction is still shrinking.

Even when the recession ends, growth is expected to remain feeble and this means that the economy will probably continue to lose jobs.

The report concludes that prior to the recession the south west’s economy was brought up on a diet of inward migration, high employment and a housing boom. It is unlikely that this pattern will be repeated in the next decade. The key question posed by the report is, “are our businesses and workers ready to take up the challenge of filling the gap left by a retreating public sector?”

Jump added: “The South West economy will have to adjust its previous development model. The public sector (including defence) and financial and business services (including housing/property) the drivers of South West activity on which we have relied in the last fifteen years, will have to be replaced by something else – probably new technologies in manufacturing, construction and business services that favour a shift to a lower carbon economy.

“This serves to re-emphasise the areas of regional development we have been highlighting for some time – investment in human and physical capital and the infrastructure of access to markets. Thereby, the region can envisage growth in the high value added companies that can … employ more people in a socially and environmentally sustainable fashion.”