View the article online at http://citywire.co.uk/money/article/a636109
‘Creative destruction’ needed to heal UK as Osborne shelves Plan A
The government has quietly ditched its Plan A of austerity measures, says Schroders chief economist Keith Wade, but the UK should hang on to its AAA credit rating.
The UK economy has not been through the necessary ‘creative destruction’ to allow a recovery, says Schroder's chief economist Keith Wade, with the continuing weakness prompting chancellor George Osborne to quietly ditch his ‘Plan A’ of full-blown austerity measures.
Despite the 1% growth in the third quarter of the year reported by the Office for National Statistics, the UK economy has flat-lined this year under the weight of the government’s austerity measures and the slowdown in Europe, the UK’s biggest trading partner.
Meanwhile, Britain’s businesses cannot get access to the credit they need to expand. Many are surviving as ‘zombie companies’, Wade said, alluding to recent research showing that one in ten companies are being kept alive only through the low interest rates yielded by ultra-loose monetary policy.
‘The problem in the eurozone and to some extent the UK is the very slow write-off of debt,’ said Wade at a presentation in London today.
‘Banks are not in a position to start lending again – they’ve still got all the bad debt, they’re still shrinking their assets…We haven’t had the write-offs needed to get banking system in state where it can start lending again,’ he added
‘The economy has not been able to move on and restructure. We’ve not had the creative destruction that is needed.’
Facing this continued weak growth, and a warning from the International Monetary Fund that it must backtrack on its money-saving programme, the government has quietly shelved its full ‘Plan A’ austerity package, Wade says. ‘We think this has been ditched by the treasury’.
Disappointing public finances for October, published this morning, mean that Osborne will likely have to admit that he will miss his targets when he stands up to deliver his Autumn Statement in two weeks. The chancellor has been under pressure to change his spending plans to do more to encourage growth.
'They will soften their stance, although they won't admit it,' Wade said.
There has been concern that if the UK does not stick to its plans to bring down its debt then ratings agencies could act on threats to strip the country of its prized AAA rating. But Wade said: ‘I don’t think its going to jeopardise our credit rating.’
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