Osborne gambles on an economic recovery

Reasons for optimism about growth beyond the immediate outlook are in short supply

Share
Related Topics

It is being widely reported that George Osborne will say on Wednesday, when he gives parliament details of public spending plans for 2015-16, that the UK economy is moving from ‘rescue to recovery’.

This should be seen as a ploy to shift the focus away from public sector austerity and on to growth in the economy. Having been the architect of the cuts, no doubt the Chancellor hopes that by linking rescue and recovery, he can also take credit for the recovery.

There are political risks in this approach.

First, the Chancellor’s statement says that rescue - i.e. putting in place tax increases and spending cuts to deal with the deficit - is incompatible with growth. This is a tacit admission that fiscal austerity over the last three years has been responsible, in part, for the weakness of the economy. The Office for Budget Responsibility (here) and the International Monetary Fund (here), among others, have already said as much. Now it seems the Treasury is ready to acknowledge for the first time that its tightening of fiscal policy has caused aggregate demand – and thus growth – in the economy to be weaker than it would otherwise have been.

Second, Osborne is gambling that the economy will recover over the next two years, ahead of the next general election.

In the short term, this is a reasonable bet. Economists have known for some time that measures of consumer and business confidence are far better than their models for understanding what is happening in the economy in the short-term. The latest round of indicators, including the closely-watched surveys of purchasing managers in manufacturing and in the service sector, suggests growth has strengthened in the second quarter. After increasing by 0.3 per cent in the first quarter of the year, most economists think real GDP could grow by a further 0.5 per cent in Q2. If it is a little stronger, it might even prove to be the best quarter for growth since the recession (if we exclude the impact of the Olympics).

However, a 0.5 per cent growth rate – two per cent at an annual rate - only appears good in the context of what has happened over the last three years. When the Coalition took office the economy had expanded by 2.1 per cent over the previous year. Even if growth is sustained at a quarterly rate over the next year, George Osborne’s opponents will be eager to point out that his ‘rescue’ will only have got us back to where he started from.

But will growth be sustained at a faster pace? Reasons for optimism about growth beyond the immediate outlook are in short supply. It is widely accepted that the UK’s growth rate has been so poor over the last three years for a number of reasons: public spending cuts, the euro zone crisis, falling bank lending to businesses and a squeeze on households’ spending power. None of these is easing.

On Wednesday we will find out details of public spending cuts for 2015-16, but we know that more cuts are certain in the following two years, and quite possibly right up to 2020. Although the Eurozone crisis has eased, in the sense of there being less talk of countries leaving the euro, much of Europe is still in recession, which is bad for British exports. Latest figures from the Bank of England show that bank lending to firms is still falling. And latest figures from the Office for National Statistics show that average earning increased by 1.3 per cent over the last year, compared to inflation of 2.7 per cent.

There are, therefore, still considerable headwinds to growth in the UK. George Osborne wants to switch the focus to ‘recovery’, but he will only be able to do so if the recovery that is clearly taking place in the first half of this year is sustained in the second half, and into 2014 too. This is far from certain.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Nursery Nurse

Negotiable: Randstad Education Manchester: Nursery Nurses needed in Manchester...

Nursery Nurse

Negotiable: Randstad Education Manchester: Nursery Nurses and Assistants requi...

SEN Teaching Assistant

Negotiable: Randstad Education Manchester: Teaching Assistants needeed in Bury...

KS1 Primary Teacher

£100 - £150 per day: Randstad Education Leeds: Qualified KS1 Supply Teacher re...

Day In a Page

Read Next
F D R and Eleanor, both facing camera, in Warm Springs, Georgia in 1938  

Where are today's Roosevelts?

Rupert Cornwell
 

Now back to the big question: what's wrong with the eurozone?

Hamish McRae
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam