Next year will be distinctly painful

Let us start with the good news: it is almost inconceivable that the British economy won’t fare better in 2010 than it did in 2009.

We have just come out of the most severe recession since the 1930s, with our economy shrinking drastically; I would hate to tempt fate but there is little that could be thrown at us in the coming year that would precipitate another such dramatic contraction. Growth is likely to make a return; in fact, the economy almost certainly started expanding again in the last few months of 2009.

But apart from that, the outlook is pretty grim. The economy is facing a huge number of challenges. The banking system is working again (contrary to what most commentators are claiming) but economic growth will be weak — not only in the year ahead but for a long time to come. In the good years, we grew used to the economy expanding by close to 3 per cent every year; we will be lucky to get half that over the next 3-4 years. Unemployment will remain high; incomes growth will be subdued; taxes will go up; many firms will move out of the UK, as will many highly paid individuals; and the public sector will face its greatest squeeze since the end of the Second World War.

We have attempted to borrow ourselves out of a crisis caused by too much debt. One result of this has been the explosion in the budget deficit to around £180bn for the next couple of years, an extraordinarily imprudent state of affairs. Whoever wins the next election will have to slash public spending; if this doesn’t happen, or if we end up with a hung Parliament, we will face a real government debt crisis, with dire consequences for everybody in the UK.