The ability of British manufacturing industry to provide strong impetus to private sector growth will be an important offset to the drag to domestic demand from the rebalancing of public finances over the next few years. There is also evidence that strong growth in the global economy is benefiting parts of the services sector. Earlier this week, the airport operator BAA reported a 7.6% annual rise in traffic volumes at Heathrow Airport in September – driven by strong business travel growth to Asia and other emerging markets. From the position a year ago – when demand had fallen sharply at home and abroad in the wake of the financial crisis – this turnaround is impressive. So my verdict on the recovery would be “so far, so good”. But we have to recognise that we are still at an early phase of the upswing. It is not surprising, therefore, that growth is uneven across sectors and from quarter to quarter, and that confidence is still somewhat fragile. The state of confidence is not helped by the negative tone of much of the economic commentary at present – which seems to reflect a high degree of nervousness about the  3  Data is latest available: for manufacturing it relates to the three months to August and for services to the three months to July. BIS Review 134/2010  3  progress of the recovery. But this raises the obvious question: if things are so good, why do they feel so bad – to some people at least?
But the planned reduction in the deficit set out in the Budget plans is comparable with the fiscal consolidation we saw in the mid-1990s, when the public spending share of GDP was also cut significantly as the economy recovered, as Chart 6 shows. Though the latest Budget plans imply a somewhat bigger fall in the public spending share of GDP than in the mid-1990s, this is offset by a smaller rise in the tax burden. Taking tax and spending together, the projected impact is broadly similar. Public borrowing fell by over 8 percentage points of GDP between 1993/4 and 1998/9, compared with a 9 percentage point fall projected in the latest Budget over the next five years. 6 That period of public spending squeeze in the mid-1990s was also accompanied by a significant reduction in employment in the public sector, not dissimilar to the figures currently being discussed in the context of the current spending review. 7 However, the UK economy grew reasonably healthily over that period, with annual GDP growth averaging nearly 3.5% a year in the five years 1994 to 1998. Unemployment also fell because the private sector generated many more jobs than were lost in the public sector. As Chart 7 shows, the private sector created around 2 million extra jobs in the mid-1990s, dwarfing the reduction in public sector employment.