Posted to Daniel Finklestein’s blog, in answer to The three greatest obstacles to Britain’s recovery?

1. The ballooning deficit – Large tax rises and increases in interest rates will slow down any recovery. Real public expenditure cuts will only happen if we are forced to by the IMF.
2. The massive increase in regulation in the past decade means that the economy has not the flexibility to create new jobs quickly.
3. Most of the growth of the past decade came from financial services and the public sector. Neither of the sectors will create many jobs in the next few years. Neither are there emerging growth areas, as in the 1980s and 1990s (security, call centres, telecoms etc.)

Please note that the three are not mutually exclusive. The financial sector is going to be hobbled by increased regulation and government ownership. Whilst I am pessimistic about the ability of government’s to control expenditure, the public sector payroll will not be increasing much in the next decade.

It is possible to replace the third point by

3. The housing market. When housing activity increases, so does a large part of the retail sector such as DIY products, furniture and carpets. There is likely to be a prolonged slump, as the volume of house sales is constrained by current credit squeeze and the oncoming interest rate hikes. House prices are likely to continue to fall, as more buy-to-let investors either desire to, or are forced to sell up. Whilst house prices are falling, people will delay buying.