This should be fine as long as the economy is slowing. But if the economy remains healthy, overspending by the government could lead to increased household expenditure and borrowing, with the knock-on effect being rising inflation. Further inflationary pressure could come from the job markets, where unemployment is at very low levels. A fresh round of bonuses and wage increases will have a bigger effect on the economy than in times of high unemployment, as more people will benefit from the increase in disposable income. The strength of Sterling is another factor that has a large impact on inflation, which the government is keen to keep at a stable and low level.
Many economists feel that there is plenty of room for a sharp fall in Sterling.
It has gained recently against the dollar and is substantially higher against the Euro compared to this time a year ago. This would mean that British exports would become more competitively priced, providing a great boost for manufacturing, but also adding fuel to the inflationary fire. This complicated set of dependencies means that the government and the MPC must think extremely carefully about the repercussions of it's decisions - a view that was reinforced by the Institute of Directors. Even though we see interest rates easing this year in response to a slowing economy, we believe that a cut today would have seemed too much like a panic reaction to last week's US cut. Manufacturers have been long been urging the government to take steps to improve the environment for British exports.