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Weak growth could send debt levels soaring

If the autumn statement by Chancellor of the Exchequer George Osborne should turn out to be correct, the UK’s debt situation may quickly deteriorate. Purportedly on the account of the current Eurozone problems and stingy bank lending, the economy looked set to grow at a snail’s pace and far below the estimations used as a basis for the current budget. As Jim Rowley of the Debt Advisory Line commented, “if the impending cuts in government spending go ahead, this may serve to increase the pace towards a fully-blown recession. The effects on debt levels and related bankruptcy figures could be disastrous.“

George Osborne certainly did his best to award a positive twist to his message. Still, as the Economist put it, few chancellors of the exchequer have ever reported such bleak news to the country.“ Although Osborne and the government had counted on a healthy 2.3% surge in 2011, overall growth amounted to no more than a meagrely 0.9%. Now, his claim that the economy may still be expanding by 2.1% in 2012 looks rather optimistic. Consequences are dire: With growth sagging, more and more people could find themselves out of work, further weakening spending power and forcing the government to dole out more out-of-work-benefits. As a result, the minister’s high-profile plan to drastically reduce and ultimately wipe out Britain’s structural fiscal deficit, no longer seems like a viable option.

In fact, the situation left the minister with a dangerous catch 22. If he persisted with his austerity measures, he risked sending the country into a spiral of recession, low growth and high unemployment. If, conversely, he chose to counter the disappointing downward turn with government spending, his initial plans of getting the deficit right were condemned to failure. For the moment, Osborne still upheld his theory that the current Eurozone troubles, rather than long-term structural economic problems at home, were to blame for the problems.

It will remain to be seen whether this estimation turns out to be true, but it can only be hoped that 2012 will bring higher growth rates. After all, if the upswing should end before it has really begun, the psychological impact could be devastating. As Jim Rowley put it: “We were and still are firmly in favour of the minister’s austerity plans. At the same time, we also recognise the danger of an overly tight budget squeezing many out of work and into debt. Anyone fearing for his job is strongly advised to contact a debt management professional now to check out all available options as early as possible.“