Keep calm and carry on says economics expert

As far as business leaders are concerned Chancellor George Osborne’s spending review could have been a lot worse than the doom and gloom merchants in the media would have us believe.

The day after the Liberal-Conservative coalition announced levels of government spending for the next four years, I nabbed an interview with Graeme Leach, chief economist of the Institute of Directors for his views.

Mr Leach is also director of policy at the IoD, which represents 42,000 people who run companies of all shapes and sizes, including hundreds across Herts.

That means he is a regular walker in the corridors of power and has the ear of government ministers and Whitehall mandarins.

Speaking to a lunch meeting in Milton Keynes, the day after the spending review Mr Leach said: “The gloom merchants have way overdone it but they have had their day.”

Boiled down, his basic argument was that there is an uncertain outlook in the economy but the cuts announced by the government were not half as brutal as they could have been and they were, in fact, “growth positive, not growth negative.”

Mr Leach said: “In the period 2011-2012 public spending actually goes up £40 billion. It is hardly a cut. In the whole period from 2009-2015/16 there is a £90 billion spending increase. On any business measure they are not cuts.” Public spending in monetary terms is powering upwards towards £800 billion.

However, after inflation is considered, spending is forecast to decrease by one per cent per annum.

“But even this does not mean a draconian, mini state. In aggregate terms, it is not very tough at all.” He almost shrugged it off as being something the private sector could cope with.

And Mr Leach pointed out that “it will be the longest sustained reduction after the longest sustained increase.” So, in fact, the nation will be returning to as we were in 2008.

As far as forecasts in reduction in public sector employment go, Mr Leach said: “We’ve been here before.” He said in the 1990s there was an 800,000 reduction public sector employment and in the 1990s, 600,000 people lost their jobs. “But that did not bring the end of the world.”

He added: “After Labour won in 1997 and they stayed with Tory spending plans, there was a 4 per cent reduction in terms of gross domestic product but was that the end of the world? No, it was a period of fastest economic growth.

“The private sector can take up the slack.”

But he warned that the economic body blow handed out by the failures of the financial system mean that growth would “not be as strong because the economic backdrop is weaker. The economy cannot grow as fast – but I am not saying that means we are going for a double dip recession. There is a possibility of it.

“Growth is not strong bit it is not as bad as the naysayers would have us believe.”

The trouble is that consumers, the traditional powerhouses of the economy, will have less money to spend going into 2011. All the job losses and the increase in VAT are expected to see the wind taken out of consumers’ sails.

And from a corporate point of view, businesses must remain confident in making investment decisions.

Mr Leach said: “The danger for all business is that everybody believes things are terrible and we talk ourselves into a hole and postpone making investment decisions. It is a difficult call to make.

“The real engine of the economy is consumer spending. In the end they will be the judge. If they keep on spending, we can be confident.”

He added: “We can avoid double dip but it is very weak.

“Confidence is the key. There is a risk of talking ourselves into a double-dip recession.”