Leading article: Uncomfortable truths for a stubborn Chancellor

The UK has more room for manoeuvre in the bond market than George Osborne will admit

Share
Related Topics

When George Osborne established the Office for Budget Responsibility he gave it a mandate to tell him uncomfortable truths about the state of the economy and the public finances. It is now beginning to do so. The truths hinted at by Robert Chote, the head of the OBR, in an interview with this newspaper today, are certainly uncomfortable for the Chancellor. Mr Chote suggests that the Treasury is likely to miss its 1.7 per cent growth target for 2011.

An analysis from the International Monetary Fund (another organisation whose economic judgement Mr Osborne has lauded in the past) issued a similar warning this week. The IMF has forecast growth for this year of just 1.5 per cent. It also recommends that Mr Osborne should be prepared for "significant loosening of macroeconomic policies" if growth remains this weak. By this it means more quantitative easing by the Bank of England and temporary tax cuts.

Yet Mr Osborne has stubbornly set his face against any change of course on the £110bn fiscal tightening over five years he announced last June. He has talked repeatedly of the need for rigorous fiscal discipline to maintain the confidence of the bond markets, arguing that any shift from the plan he laid out more than a year ago would spark a market panic that would force up interest rates.

There is, however, more than one way to lose market confidence. Investors in recent weeks have shown that they can be rocked just as much by doubts about a nation's ability to generate growth as concern about its determination to balance its books. Moreover, persistently weak growth could jeopardise the very goal of deficit reduction that Mr Osborne has made his lodestar. If growth does not materialise, unemployment will remain high. And if those half a million or so public sector workers who are expected to lose their jobs as the Government slashes public spending over the coming years do not find jobs in the private sector, unemployment will actually increase. And if unemployment increases, so will welfare payments. And this, in turn, means that Mr Osborne's cherished medium-term deficit reduction targets will be missed.

What the IMF argues is that under circumstances of prolonged weak growth, a change of fiscal course would be appropriate. As indeed it would. The grave danger is that a prolonged period of weak growth would turn an otherwise temporary unemployment surge into a permanently high jobless rate; and that a collapse in consumer and business confidence would become a downward spiral. A loosening of short-term fiscal policy, which would help to avert such a loss of confidence, should not therefore be seen as a jettisoning of medium-term deficit-reduction goals, but an attempt to keep those goals in sight. The UK has more room for manoeuvre in the bond market than Mr Osborne will admit. The fact that our borrowing rate has been driven so low makes it abundantly clear that investors are not worried about the creditworthiness of the UK.

The Chancellor and the Government need to understand that flexibility in the face of changed economic circumstances is not a vice, but a virtue. And it is becoming increasingly clear that Britain's economic circumstances have indeed changed – and for the worse.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Teaching Assistant for KS1 & KS2 Huddersfield

£50 - £65 per day: Randstad Education Leeds: We are looking for flexible and i...

Teaching Assistant for KS1 & KS2 Huddersfield

£50 - £65 per annum: Randstad Education Leeds: We are looking for flexible and...

Primary Teaching Supply

£130 - £160 per day: Randstad Education Leeds: Qualified KS2 Supply Teacher r...

Year 1/2 Teacher

£130 - £160 per day: Randstad Education Leeds: Qualified KS1 Teacher required,...

Day In a Page

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
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week
The fall of Rome? Cash-strapped Italy accused of selling its soul to the highest bidder

The fall of Rome?

Italy's fears that corporate-sponsored restoration projects will lead to the Disneyfication of its cultural heritage
Glasgow girl made good

Glasgow girl made good

Kelly Macdonald was a waitress when she made Trainspotting. Now she’s taking Manhattan
Sequins ahoy as Strictly Come Dancing takes to the floor once more

Sequins ahoy as Strictly takes to the floor once more

Judy Murray, Frankie Bridge and co paired with dance partners
Wearable trainers and other sporty looks

Wearable trainers and other sporty looks

Alexander Wang pumps it up at New York Fashion Week
The landscape of my imagination

The landscape of my imagination

Author Kate Mosse on the place that taught her to tell stories