Cameron's Economic Headaches

He may have been spared his usual shouting match at Westminster this week but David Cameron has nevertheless suffered two major headaches in the past few days.

It doesn’t take a hardened conspiracy theorist to be suspicious of this week’s apparently unplanned and unexplained Commons ‘mini-recess’.

After all, Wednesday was the day the latest unemployment figures were released, and they painted a bleak picture of the state of the British economy and its short-term prospects – fears backed up by the Bank of England’s latest downward revision of its influential growth forecast, announced on the same day.

Ed Miliband said it at Prime Minister’s Questions when the previous figures were released last month and it’s a theory that is gaining traction with every pessimistic analysis and every screaming headline – surely the deficit cannot adequately be tackled while the government’s welfare bill continues to rise?

How can the government have a ‘credible plan’ for debt reduction without a credible plan for economic growth?

It’s a persuasive argument, and the government cannot fail to be worried by the persistence of the jobless recovery. The longer it goes on, the more entrenched it becomes, as habits and attitudes harden amongst prospective employers and employees alike.

However (although no minister would dare to admit it), since the main cause of the stubbornly high unemployment is the failure of the private sector to step in where the public sector has retreated, a cold-blooded realist might argue that the current position is merely an inevitable, and thus largely expected, consequence of the government’s austerity policies.

Unemployment a price worth paying, and all that.

In all honesty, the success of the strategy cannot and should not be measured at this stage – because of particular external influences but also because it’s a plan not for a year but for a Parliament or even an entire economic cycle.

Nevertheless, the electorate’s growing impatience with, and declining trust in, the government is understandable, given the harsh reality that has now set in. At least we no longer hear talk of when the cuts will ‘begin to bite’ – they have now well and truly taken hold.

This should offer rich pickings for the Opposition – and their message is, finally, starting to get through. However, by advocating more tinkering with VAT, more borrowing to invest in long-term infrastructure projects and more tax breaks for small firms, Labour (already hobbled by their economic legacy) are leaving themselves wide open to accusations of fiscal irresponsibility.

And if the Prime Minister was tempted to waiver in his dedication to his own tough strategy – on whose basis his party won the most seats in last year’s election – this week’s other, even more serious, crisis would have reminded him of the dangers of the alternative path.

Today’s meeting in Berlin with Angela Merkel may have failed to “make any progress” (her words) on areas like a financial transactions tax and the role of the European Central Bank, but it also reminded the two leaders of where their natural political like-mindedness brings agreement – on the importance of retaining the single market and of reducing sovereign debt.

Today also saw the return of Spain to the melting pot of investors’ paranoia – bond yields (i.e. the country’s cost of borrowing) rose even above those of Italy, as fears grew about the level of private borrowing in Spain, which is as much a cause for worry as Italy’s national debt.

And all this just two days before Spaniards give their verdict at the ballot box, and shortly after Italy’s government – with its once seemingly impregnable figurehead – collapsed.

The stakes are high for everyone.