The economic news has got steadily worse and forecasts have been regularly reduced. The bad news from the USA is that economic growth there has been much below earlier estimates. The eurozone has problems with sovereign debt and forecasts of UK growth are being lowered yet again. So what can be done?

Uk priorities should be growth and employment, as well as reducing debt. The average UK GDP growth rate is about 2.5% per year. This is equivalent to an increase in the country's wealth of over £35 billion. Government cuts over four years would average about £20 billion per year (obviously less if spread over five years). Tax increases are over £30 billion over the period.

Creating Growth - investment is the main factor creating growth. This must increase the total of debt of either the government or the private sector or both. There is a clear distinction between debts because of investment and debts caused by borrowing for consumption. The budget is of the second variety, and must be ended as soon as possible.

We don't doubt that the government would like to see growth. The original estimates for growth this year were forecast to be around 2.5%. They are now expected to be around 1.4%. The international environment has limited our export drive, but, more importantly, the government's planned cuts have already proved excessive, in particular by damaging confidence which is an essential ingredient for a successful economy.

Government priorities - In the budget of June 2010 the government made it clear that "Reducing the deficit is a necessary precondition for sustained economic growth". We argued that, on the contrary, economic growth was one important part of the means for reducing the deficit. Comparison with Greece was obviously rubbish, and there was never evidence of losing international confidence. Bond interest rates remained consistently very low. The aim of economic policy should have been directed at a careful balance between the two objectives of deficit reduction and economic growth.

Our analysis above is mainly economic, but the government also had another objective, namely to downsize the public sector. The cuts fitted neatly into this objective. The result, however, has been a massive waste of national resources, since growth in the last year has been pathetic. The private sector has so far failed to fill the gap left by the cuts. The rich are richer and the poor are poorer. Our social fabric is damaged.

International Solutions - It is not possible for countries to have large import or export surpluses for ever. Yet this has been happening in both the world at large and in the eurozone. The US needs to reflate, cut government costs, and lower its exchange rate. The same goes for the UK. This cannot be done in the eurozone with all countries using the same currency. A possible 3-part solution might be: firstly, extended austerity in the deficit countries. This is already happening. Secondly, considerable investment in the deficit countries, financed by the surplus countries, mainly Germany. Thirdly, a small devaluation, though this would be opposed by Germany.

Whatever the solutions it will be politically difficult and will take many years.The prospect of things going wrong is quite high. The international economic outlook is not good.

NB. Austin Mitchell wrote a piece about what he thought the government should do. It was written whilst Gordon Brown was prime minister. To read it click here