Quite apart from the damage in the labour market, a significant economic slowdown would tend to weaken the public finances. We get the latest snapshot of the government borrowing situation on Friday. This will be the penultimate set of borrowing figures before the Budget.
If the public finances look like turning out worse than previously envisaged, this will pressurise the Chancellor into a tougher package of spending cuts and tax increases.
Unfortunately, that would tend to weaken aggregate demand, despite the accompanying improvement in the prospects for interest rate reductions.
Sadly, economics is full of trade-offs. Things like immaculate disinflation are the exception, rather than the rule. This government faces some agonising choices, made worse by its early blunders over public sector pay.
Immaculate disinflation offers the prospect of economic support for both the bond and equity markets. The bond market can savour lower inflation and the lower interest rates that should go with it, while the equity market should enjoy the hope of strong profits that would normally accompany a strong economy.
By contrast, disinflation accompanied by a weak economy might be good for bonds but it would not help the equity market – or the Government.
If only there were an escape mechanism like the ERM exit. With one bound, we could be free! Ironically, many Labour MPs fondly imagine that such an escape may come from a re-entry, namely rejoining the EU, or something close to it. They are gravely mistaken.
Roger Bootle is senior independent adviser to Capital Economics.
roger.bootle@capitaleconomics.com