George Osborne claimed a decisive victory for his economic policy by telling Labour it had “lost the argument” and predicting that Britain was now finally “turning a corner”.
Speaking at a building site in the City of London the Chancellor said Britain’s return to growth over the first half of the year, after two years of stagnation, vindicated his bitterly-contested deficit reduction programme and demonstrated that only he could be trusted with the economy.
“We held our nerve when many told us to abandon our plan” he said. “The evidence increasingly suggests that our macroeconomic plan was the right one and is working.”
At the beginning of this year there were widespread concerns that the economy would slip into an unprecedented “triple dip” recession and the Chancellor was dealt a political blow when the previously supportive International Monetary Fund recommended an easing of planned spending cuts in order to support the recovery.
But since then the Office for National Statistics has reported that the economy grew by 0.3 per cent in the first quarter of the year, accelerating to 0.7 per cent in the second quarter. City economists expect a still stronger GDP figure for the third quarter and most are revising up their forecasts for the coming years.
“In my view the last few months have decisively ended this controversy” said Mr Osborne. The Chancellor also used his speech to hit back at claims he has given up on rebalancing the economy away from debt and consumption towards manufacturing and exports. He insisted that Britain was experiencing a “balanced, broad based and sustainable recovery”.
Mr Osborne also defended his mortgage subsidies, which critics regard as likely to blow up another distorting housing bubble, pointing out that average home prices were still 25 per cent below their peak after adjusting for inflation. He called his Help to Buy shared equity scheme for first time buyers a “sensible, time-limited and necessary financial intervention”.
But Labour accused the Chancellor of complacency over the recovery and indicated it would fight the next election in 2015 on the issue of living standards, which have fallen since the global financial crisis as wages have been outstripped by inflation.
“We’ve lost business investment, we’ve lost jobs, we’ve lost growth, we’ve lost living standards” said the shadow Chancellor Ed Balls. Some City economists also expressed reservations over certain of the Chancellor’s claims in his speech. “Rather than being ‘balanced, broad-based and sustainable’ the recovery has been heavily reliant on low interest rates and rising optimism getting consumers out consuming instead of saving” said Rob Wood of Berenberg Bank.
Despite the return to growth this year the economy remains some 3 per cent smaller than it was before the financial crisis struck in 2008. Other major economies such as America and Germany have recovered their lost ground. The new Governor of the Bank of England, Mark Carney, recently noted that the British economy was experiencing its slowest recovery from a recession in a hundred years. Mr Carney and the Bank have signalled that they intend to keep interest rates at their present historic lows of 0.5 per cent until 2016.
Chancellor’s claims: Are they sustainable?
What Osborne said: “We held our nerve when many told us to abandon our plan.”
Is he right? Only half true. The Chancellor refused to sanction a discretionary public spending boost in order to boost growth, as the IMF (among others) recommended. But when the economy stalled and borrowing soared unexpectedly last year he did allow the second part of his “fiscal mandate” (to reduce the national debt as a share of GDP by the end of the Parliament) to lapse, rather than cutting further to compensate. Earlier this year the Chancellor also gave up on trying to rebalance the economy towards manufacturing and exports. Instead he decided to boost consumer confidence by subsidising the mortgage market. That was effectively a Plan B, if not the one his critics were advocated.
Osborne: “The soaring budget deficit had its roots in an unsustainable increase in public spending in the eight years before the crisis.”
Is he right? Highly tendentious. No one now disputes that Gordon Brown was borrowing too much heading into the crisis in 2007. But this structural deficit was by no means clear at the time. Indeed, George Osborne himself, while in opposition, pledged to match Labour’s spending plans. Moreover, the explosion in the deficit in 2008-09 to over 10 per cent of GDP was mainly a result of a collapse in tax revenues. It was not a result of any increase in public spending levels relative to pre-existing plans.
Osborne: “[My critics] cannot explain why the UK recovery has strengthened rapidly over the last six months.”
Is he right? The return to rapid growth in 2013 has been a surprise to everyone, not just those who identified the Chancellor’s austerity as an unnecessary shackle in the immediate term. The Office for Budget Responsibility, which broadly shares the Chancellor’s view that adverse external conditions rather than domestic fiscal policy have been holding back the economy, did not expect it either. As recently as March the OBR forecast growth in 2013 of just 0.6 per cent. Over the first six months the economy has already grown by around 1 per cent.
Osborne: “Plan B would have risked higher interest rates as the UK became sucked into the eurozone sovereign debt crisis on our doorstep.”
Is he right? Always an unlikely scenario given that the UK, unlike the crisis-hit European states of Italy and Spain, has an independent central bank which, in extremis, is able to fund the Government’s deficit.
Osborne: “Those in favour of a Plan B have lost the argument.”
Is he right? An assertion unsupported by evidence. The Chancellor’s Keynesian critics argue that the UK’s growth would have been stronger and the cyclical recovery started earlier if George Osborne had not hiked taxes and cut public spending as drastically as he did in 2010 and 2011. He cannot point to any evidence from what has happened in the past three years, either in the UK or elsewhere, that shows they are wrong in this belief.