The recovery is being undermined by the Goverment's failure to get a grip on spending

Mar 02 2010

Writing in the Telegraph, Jeremy Warner really nails what is going wrong in the economy right now:

"Together with Kraft's £12bn bid for Cadbury, Pru's assault on the Far East gives the impression of a renewed outbreak of merger mania. The reality is very different. These are exceptions, rather than the rule. The debt fuelled private equity takeovers that fed the mergers and acquisitions boom of the pre-crisis years have gone. And as yet there is not much sign of them being replaced by an outbreak of the more conventional company to company M&A that you would expect at this stage of the cycle as the strong seek to capitalise on their advantage over the financially stretched and weak with consolidating, cost cutting takeovers.

Why haven't we seen more of this? The answer can be expressed in a single word, and it is the same thing as is driving the pound lower – uncertainty. Limited growth prospects in combination with a record public deficit and confusion over the outlook for public policy has resulted in a form of paralysis so debilitating it might reasonably be characterised as rigor mortis. Companies prefer to batten down the hatches, pay down debt and await developments to taking the risk, investing and acquiring."

Of course, that lack of confidence doesn't just affect mergers and acquisitions, it affects a wide range of investments. Companies are going to play it very safe until they know how the Government is going to respond to the deficit.

I wrote about this problem last week. The answer is clear, the Government need to show how they are going to fill the hole in the public finances without making Britain uncompetitive. Measures like the hike in National Insurance rates and the new 50p top rate of tax suggest that - when push comes to shove - they will tax firms and high earners as easy political targets. That will signal to any businessman looking at the towering deficit in the public finances that there is a huge risk that the returns on any investment they make now will face much higher taxes. With that risk, plenty of investments just won't make sense and won't be made.

The only way of reassuring businesses and families and encouraging them to get investing and spending again, and jump starting the economy, is to take action on spending. We've been working on how that can be done with major reports on how to save £50 billion and the parties' responses to the fiscal crisis and will be following that up with a book on the subject shortly.