Economic recovery is a slow and painful process

Muller’s view remains contrary for many. “I firmly believe we are in for a double-dip recession,” says Kevin Dickens, president of the UK200Group of accountancy and law firms. “The recent recovery in the stockmarket was fuelled by massive injections of public cash into the banking system, a desperate need for the public and investors to hear some good news and the tiny returns on cash savings. I moved all of my pension pot into cash funds a couple of weeks ago. My clients are telling me that business, both on the high street and in what we have left in our manufacturing industry, is slow - and not gaining momentum.”

With that massive budget deficit hanging over our heads, is there no alternative to painful public spending cuts in the next year and well beyond?

“The main obstacle to economic recovery will be the inevitable squeeze on government spending and tax rises,” says Nellis. “These cannot be avoided.” As most concur, Tony Nash, area director of large corporate markets at Lloyds Banking Group, believes the level of public debt can only be tackled with tax rises and cuts in public spending.

Professor Mariana Mazzucato, who holds the chair of economics and innovation at the Open University, believes growth in the next two years will depend on the ability of the financial system to restructure itself “so that it nurtures those companies willing to undertake risky technological and organisational experimentation ­ potentially leading to new products and processes, the foundation of long-term growth,” she says. “The current signs are not so encouraging on this front, so a harsh wake-up call is needed if we are to achieve growth in 2010.”

Of course, companies need cash to execute research and development ­ and for many this means bank finance, which, as we know, has been frozen for some time. But in recent months, the story has evolved as businesses have begun to count it out as an option and find other ways. Banks are now focused on lending only to the strongest businesses with the most experienced teams ­ in other words, they’re risk averse ­ and this is not likely to change in 2010.

“We remain focused on supporting experienced management teams with credible business plans. We are very keen to support both new and existing clients’ investment plans and in these economic conditions, opportunities will arise, such as investment in technology to reduce costs and the purchase of under-managed businesses,” says Lloyds Banking Group’s Nash.

But Professor Ismail Erturk, senior fellow in banking at Manchester Business School Worldwide, believes confidence is the biggest factor in whether businesses want to invest or not.

“The problem is that companies don’t wish to borrow and invest because the economic outlook is bad. Fiscal policy in the form of tax cuts may play a greater role in economic recovery ­ ultimately, what is needed is public expenditure but governments have big deficits and cannot do this,” he says. “I don’t think industry will carry out investments if the economic outlook looks bad. SMEs suffer from bank lending restraints, but big corporations have access to capital markets.”

Will a potential change in government be a good thing, a bad thing, or make no difference to the level of public spending cuts that seem inevitable?

Cranfield’s Nellis says it won’t change the inevitability of a squeeze on government spending and increase in taxes, though a Conservative government “is likely to seek cuts in some of Labour’s more social-orientated programmes.”

NIESR’s Kirkby thinks the scale of the structural deficit means that a combination of cuts to expenditure plans, tax increases and the bringing forward of planned increases in the state pension age may be the best approach to reducing the structural deficit. Even though most are convinced (or resigned) to the fact that the UK will see the Conservatives triumph in 2010, Doughty doesn’t agree.