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Debt Crisis: As Growth Slumps, Should Britain Borrow More?

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TREASURY
With gilt yields approaching record lows, some economists suggest the government should consider borrowing more | PA

David Cameron may have made a dramatic U-turn and changed his conference speech to remove a call for households to pay off their personal debt, but his government has stuck to its guns on its austerity plans and on its desire to trim the national debt from its current £950 billion in the short term.

However, some economists are suggesting that, in the face of weaker growth figures and a surprisingly conducive lending environment, that the treasury should hold off on austerity.

The markets currently see gilts as a safe haven from the crisis in the eurozone, despite the evident slowdown in growth in the UK. Yields on British debt are approaching record lows, meaning that the price of borrowing is low.

Even the International Monetary Fund (IMF) is saying that, should the country start to miss its growth targets, it should reconsider its austerity and debt reduction strategy and take advantage of reduced borrowing costs in order to stimulate the economy.

“If activity were to undershoot current expectations and risk a period of stagnation or contraction, countries that face historically low yields (for example, Germany and the United Kingdom) should also consider delaying some of their planned consolidation,” the IMF’s October regional outlook for Europe said.

UK growth figures again disappointed, with the Office of National Statistics saying on Wednesday morning that gross domestic product (GDP) rose by just 0.1 per cent, with manufacturing output rising 0.2 per cent. Overall output from the production industries fell 1.2 per cent.

In this environment, finding additional money to stimulate growth could be an attractive option, even if it means putting deficit reduction on ice.

“It depends on what you do with the money,” Strategy Economics’ Matthew Lynn said. “You can’t really argue - and Osborne tends to argue this, he’s kind of stuck in a groove - that if we don’t get the deficit under control then we’ll turn into the next Greece, or the next Italy. That’s incompatible with the facts.”

The bond markets have punished both Greece and Italy for their spiralling deficits and failure to deliver meaningful growth plans, with yields on both countries’ debt growing - in Greece’s case to unsustainable levels. The UK has not suffered from the same problem.

On Monday, Standard and Poor’s, the rating agency, reaffirmed the UK’s AAA sovereign rating, having downgraded Italy in September. Fitch Ratings also dropped Italy’s issuance by two notches on Tuesday night.

Lynn believes that the most efficient use of any money raised would be tax cuts.

“We have an uncompetitive tax system,” he said. “We have some of the highest taxes in the world, our corporate taxes are still very uncompetitive, and the UK has always flourished as a relatively low tax economy ... We need to get more inward investment, and we need to stimulate entrepreneurs, and they respond to tax cuts.”

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