Institute of Directors warns Government not to 'wobble' on austerity measures

A leading business group has warned that the financial recovery is at risk from a "wobble" within the Coalition on implementing the Spending Review.

George Osborne's austerity measures will lead to high unemployment next year, experts warn.
George Osborne's austerity measures will lead to high unemployment next year, experts warn.

The Institute of Directors (IoD) has argued that although the Government's austerity measures are vital, the Chancellor's ability to implement them could be derailed by "Whitehall inertia and lobbying from the public sector".

In a paper entitled "Don't go wobbly, George", the trade body said: "There is a growing danger that if part of the Coalition is already wobbling on a politically sensitive issue like university tuition fees, it might wobble even more on what is a much bigger fiscal issue, not least because political opposition to deficit reduction has yet to reach fever pitch."

The IoD warned that the markets are volatile and that "any indication of retreat from the Spending Review will be pounced upon".

Gilts are particularly vulnerable, the IoD said. "The last thing the UK economy needs at present is a spike in gilt yields with negative knock-on effects on business investment and the mortgage market," the paper says. "Any spike would also undermine quantitative easing: a key QE transmission mechanism is asset purchases pushing up gilt prices and lowering yields."

Graeme Leach, chief economist at the IoD, said: "As the political heat rises over the next few months, we urge George Osborne to hold firm on the Spending Review. If any part of the Coalition shows even a slight loss of nerve, holders of government debt could lose their shirts."

The economist also warned that a "unless we regain control of public spending now, we could lose it for a generation".

The IoD argued that the Coalition should not be dissuaded from its course because the measures are "not as radical as opponents claim". It argues that the public sector job losses are "entirely reasonable" while productivity in the sector is likely to improve, not be undermined.

Separately, the UK's construction sector surprised with a modest increase in activity in November, although conditions remain tough, according to a leading survey.

The level of new orders grew, but at the slowest pace in nine months, the Markit/CIPS purchasing managers' index showed, as businesses reported prolonged wrangling over contracts.

Overall, the index edged up slightly to a reading of 51.8 from October's 51.6, better than the fall to 51.0 analysts expected, but only just above the over-50 level which indicates expansion.

While both commercial and civil engineering activity rose, house building fell for a third month against the backdrop of the stagnating housing market.

The sector cut jobs for a fifth month in a row, but optimism nonetheless improved – albeit staying low by traditional standards - as companies expect conditions to improve over the coming year.