"We are all Keynesians now"

It is what we have all been waiting for: slamming the door on the recession.

However, we must not be too hasty - the prospect of a strong recovery lies in the balance. Figures that the economy grew by 0.1% in the last quarter of 2009 was substantially weaker than what most economists predicted. More worrying is that the figure could yet be revised downwards. The latest reading is only the first of three. The next two will come in February and March. It is entirely plausible that we could record minus growth again, just like in the recession of 1990-2.

There are two factors that will jeopardise the recovery. Firstly, with the election battle in full swing, Labour and Conservatives are keen to show that they can handle the budget deficit. In many areas they will be looking for spending cuts. This is a risky business. If any good can come out of Japan's demise in the 1990s, it is that there are pertinent lessons to be learnt. Japan tightened their fiscal policy before private demand could sustain itself. We must not take the same path and risk a double-dip recession. The second threat to our recovery is inflation. There has been a sharp rise in inflation to 2.9% (CPI index). Although this can be largely attributed to the VAT rise back to 17.5%, consumers will nevertheless cut spending. The Bank of England sees the hike in inflation as temporary, but the public may not.

It is in this dire context that the government must sustain the recovery. The goverment must continue to sustain demand through big spending to encourgae businesses to invest. It is the proper role of government to fill the shorfall in private demand - "we are all Keynesians now." However, this will come at a cost. Our budget deficit is utterly unsustainable. If the government continue to spend more than it recieves from tax receipts for much longer, confidence will plummet. Credit agencies have already warned that our AAA status is being threatened. A downgrade will have catastrophic results. Interest rates will soar as creditors judge loans to be very risky. The rate at which the goverment must press the brakes on our aggressive fiscal policy is very much a judgement call. The rate of growth, unemployment levels and credit levels must all be considered.

Britain were worryingly sluggish out of recession. These new figures of timid growth is not a poll asset for Labour. But it can be used to scare the public away from Conservative plans for unprecendented cuts.