UK Plc

The UK economy has contracted again. It is true that much business confidence has haemorrhaged as a result of the death from a thousand cuts that is the slow -motion marital bust-up of the euro-crisis.

But for all this, the latest deterioration in our economic position will undoubtedly get people thinking harder about the opposition's cry that we are cutting 'too far, too fast'.

It would be foolish though to be seduced by this suggestion — any significant attempt to conjure growth through turning on the spending taps will simply spook the markets, increase our borrowing costs and result in increased interest rates for businesses and mortgage holders.

Critical to getting growth going is to re-instil business confidence. Not easy given that the range of risks companies consider is everything from a slow recovery to a euro-zone wipe-out that will make the 2008 credit crunch look like a bonus day at Barclays. So how do we improve confidence?

My view is that we must lower business and employment taxes. This will require further reductions in spending. Something that will not be without pain but the prize will be there in terms of growth and prosperity if we have the will to do it quickly.

As an example of how great that prize could be for getting on top of government expenditure consider this. If, in real terms, public expenditure had been held at its 1997 level, then by today we would not only have no deficit whatsoever but we would also be able to remove from income tax anyone in this country earning up to £100,000 a year. meaning that hardly anyone would be paying income tax at all.

Pressing down more firmly on expenditure and reducing taxes on jobs and growth must now be our urgent priority.