UK fiscal stimulus 'must not be withdrawn too quickly'

In order to promote economic recovery in the UK, fiscal stimulus packages must not be withdrawn too quickly, it has been asserted.

Hetal Mehta, economist and economic advisor for the Ernst & Young ITEM club at Oxford Economics, made her comments following the recent publication of data by the Office for National Statistics, which showed that gross domestic product in the UK fell by 0.4 per cent in the third quarter of 2009.

Ms Mehta stated that the UK has ’vast quantities’ of governmental debt and that borrowing is still taking place at a ’rapid rate’.

She suggested that the key to enhancing the market lies in not providing more fiscal stimulus.

However, the sector commentator also advised that the rug must not be pulled out of the recovery by withdrawing the stimulus package too quickly, which could potentially prolong the recession or hamper market recovery in some other fashion.

Jeremy Beckwith, chief investment officer at Kleinwort Benson, commented:

’Both the UK government and the Bank of England have consistently made it clear that the threat of deflation is both more pressing and potentially more damaging to the economy than the threat of inflation.

’We would agree with that – it is fairly straightforward to set an anti-inflation policy, though it may not be politically very popular. However, as the Japanese have found - and continue to find, setting an effective anti-deflation policy is very difficult if a deflationary mindset has gripped the economy.

’So, it is important not to withdraw the stimulatory measures before the economy has found some momentum of its own – this may require larger fiscal deficits in the short term.’ADNFCR-2318-ID-19475887-ADNFCR