UK Politics

Ed Balls says UK economy is stuck in 'vicious circle'

Shadow chancellor Ed Balls
Image caption Mr Balls said the "consensus" over the pace of cuts had to be challenged

Ed Balls has warned the UK economy is in a "vicious circle" with austerity measures damaging confidence and exacerbating the deficit problem.

The shadow chancellor said growth was "stagnating" and the example of Ireland and Greece proved cuts alone would not bring down borrowing without expansion.

His remarks came after the Bank of England lowered its 2011 GDP forecast.

But Chancellor George Osborne said he was delivering economic stability and market confidence had improved.

Both men gave rival speeches to the Institute of Directors' annual convention on Wednesday.

'Worse not better'

Mr Balls said the UK needed a "credible" deficit reduction plan and accepted spending cuts and tax rises were necessary.

But he accused his counterpart of neglecting the need for growth to reduce the deficit and suggested the UK risked falling into the same trap as Ireland, Greece and Portugal - all of which had to be bailed out despite introducing stiff austerity measures.

"What Ireland, Portugal and Greece have all discovered is that it does not matter how much they try to cut spending or raise taxes - if they cannot create jobs and growth, their debt and deficit problems and the loss of market confidence gets worse not better," he told the business audience.

"And my concern is that we are seeing the same vicious circle here in Britain.

"If the economy is not growing and so fewer people are in work paying taxes - and more people claim benefits instead - it makes it harder to get the deficit down and harder to maintain confidence."

Mr Balls, who has argued for a slower pace of deficit reduction than the coalition, said the government was not facilitating the growth agenda by abolishing regional development agencies and scaling back some infrastructure projects.

"I fear that taking the view that the only thing government needs to do for business is just to get out of the way risks undermining your (business) efforts, not backing them."

He also rejected suggestions he was "talking down" the UK's economic prospects, saying contrary voices had been "silenced" in the past - such as on the dangers of joining the Exchange Rate Mechanism - and this had been damaging for the UK.

"Adopting the consensus view may be the easy and safe thing to do but it does not make you right and, in the long term, it does not make you credible," he said.

'Unwavering'

The Bank of England downgraded its expectations for growth in 2011 from 2% to 1.75%.

Governor Mervyn King, who has backed the government's efforts to cut borrowing, argued that the economy faced "a difficult time ahead" and a "prolonged adjustment" to the legacy of the financial crisis.

The UK economy grew by 0.5% in the first three months of the year, which followed a contraction of 0.5% at the end of 2010.

Mr Osborne said the government had delivered economic stability at home and increased market confidence in the UK by clearly signalling its determination to get to grips with the deficit since coming to power a year ago.

"We have the interest rates of Germany despite having a bigger budget deficit than Greece or Portugal," he said.

"That is our achievement."

Both Conservative and Lib Dem coalition partners, he added, were as "united as we have ever been" over the need to see through their plan to eliminate the structural deficit by the end of the Parliament in 2015.

"We are unwavering in our commitment to economic stability and recovery, last year, this year and for the four years to come.

"Every business in this country depends on a strong government and a strong economic policy and this coalition government will deliver just that for the next four years."

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