George Osborne received a double helping of good news yesterday: better-than-expected figures on the strength of the recovery and an upgrade from the credit-ratings agency Standard & Poor.
The latter changed its outlook for the British economy from “negative” to “stable”. That will be especially comforting for the Chancellor as he has put restoring international investors’ confidence at the centre of his strategy of deficit reduction and cuts. It also means the possibility of Britain’s undergoing a Greek-style sovereign-debt crisis is becoming more remote.
Senior ministers were delighted by the vote of confidence and the growth figures, which were at the top end of their private expectations. Despite last week’s announcement of severe spending cuts, ministers believe the recovery will be sustained into the fourth quarter of the year and beyond, albeit possibly at a lower rate.
One Treasury source said: “We are absolutely not complacent, but it further underlines that confidence is returning to the economy, leading to a strong recovery.”
Mr Osborne told the Cabinet yesterday that the world economy remained “relatively choppy” but there were grounds for optimism that a recovery was underway. Ministers discussed plans to focus on all areas of public spending to ensure the focus was on fostering growth through removing unnecessary bureaucracy.
Underlining the message, Philip Hammond, the Secretary of State for Transport, gave the green light to 16 road and transport schemes which he told MPs would “provide a vital economic boost”. The projects include upgrades to the M1, M6 and M25.
Standard & Poor said the Coalition Government had "shown a high degree of cohesion in putting the UK's public finances on to what we view to be a more sustainable footing.
“The policy objective to close the fiscal gap further underpins the ratings. We believe that the completion of the government's Spending Review reduces uncertainties about its political resolve to tackle the challenges resulting from the structural deterioration in public finances.”
Mr Osborne welcomed the news: “Today’s figures show the economy continuing to grow, at double the rate the market expected and the fastest rate for the third quarter since 1999.”
The surprising momentum of the recovery will also reduce risks to Mr Osborne’s strategy. If the double dip is not severe, and unemployment doesn’t rise as much as feared, then tax revenues will be healthier and the bill for benefits lower, implying Mr Osborne is more likely to hit his targets for government borrowing. The Office for National Statistics said yesterday that the economy expanded by 0.8 per cent in the three months to September, about double the pace estimated by City forecasters. The Bank of England will also be able to defer any resumption of its “quantitative easing” programme, although most economist expect the economy to weaken next year as the spending cuts and tax hikes bite – epically after the rise in VAT to 20 per cent in January.
The good economic news for the Government leaves the opposition in a potentially awkward position, as they have staked much on the failure of the Government's policies and this leaves them with the task of explaining away encouraging data, at least for the time being. The shadow Chancellor, Alan Johnson commented: “Momentum remains from Labour's support for the economy - especially the construction sector. The risk going forward is that the Government has a plan to cut one million jobs, but no plan to support the private sector in replacing them.
“Yes the deficit needs to be reduced - but it needs to be at a pace that the private sector can manage.”