Britain's shrinking economy: panel verdict
25 January 2011Lucy Parsons: 'This is a period of adjustment'
The growth figures today are a sobering reminder that the UK did not enter the global financial crisis in a position of strength. The UK had the largest structural deficit in Europe. The government was running deficits even when the economy was experiencing strong growth (when other countries were "banking" their surpluses to prepare for future costs). A recent EU paper highlighted that the UK had one of the worst household debt to GDP ratios and debt to disposable income ratios in Europe.
So the UK is a nation of spenders, not savers, and this high level of economy-wide debt is one reason the economy was particularly vulnerable to the global financial crisis. The consequence is that Britain is now going through a period of adjustment to get to a more sustainable economic position - a period of short-term pain necessary for long-term gain.
Part of this adjustment means securing the health of the public finances through the fiscal consolidation that the government is implementing. Spending cuts rather than tax rises are the least damaging way of reducing the structural deficit. A lot of the money that was being spent on public services was poor value for money. The costs of government entitlements in areas such as health and pensions are rising due to our ageing population and the longer we wait to reform these systems the higher the costs of change will be. And even if the public finances were in better shape, reducing government debt would be sensible given the rising costs of servicing debt.
The UK has been living beyond its means. Getting back on the path to long-term economic growth will mean a period of belt-tightening in the short-term.
Lucy Parsons is a research director at Reform, a thinktank that seeks to modernise public services
@reformthinktank
