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Public spending can hold off a slump

The outlook for the UK economy has changed markedly over the past few months, says Allan Wilen

As the credit crunch has begun to bite, firms and households alike are reappraising their spending.
While most forecasters expect continued, albeit weak growth, significant risks remain. The Bank of England’s initial response has rightly targeted problems in the financial markets.

But the Government should be preparing now for more radical action, with a central role for the construction industry, should conditions in the wider economy deteriorate.

The Bank of England’s efforts to stabilise the financial markets have had limited success.

Despite lower base rates and other measures, banks have been slow to pass the rate cuts on and remain reluctant to lend.

This is most evident in the mortgage market, where lending is now at its lowest level for 30 years and there has been little improvement in the fixed rate deals available.

Lessons from the US, where the downturn is more entrenched, suggest that sharp interest rate cuts are of little help to the wider economy if banks are unable or unwilling to pass on the benefits to borrowers.

In response, the US Government is providing a rebate to some 130 million tax-payers to rekindle consumer spending.

The danger of this approach is that hard-pressed households may choose to increase their savings and pay off debts rather than spend their tax windfall.

Similarly much of the £2.7 billion rebate announced by the Chancellor last week may be saved rather than spent.

Long-term benefits

Direct Government investment in capital projects can provide a more effective lift to a flagging economy.

There are plenty of potential schemes that could provide long-term benefits, whether it’s accelerating school building programmes, purchasing surplus stock from house builders for social housing or implementing a major programme to improve the energy efficiency of the existing housing stock.

Such programmes take time to plan and deliver, however.

The Government should be taking the necessary steps now to ensure that if the UK economy does stall, it can move quickly to bring forward investments in the built environment.

Allan Wilen is economics director at Emap Glenigan