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June 24, 2013 7:55 pm
For three years, George Osborne has found foreign alibis for Britain’s economic sloth. The Office for Budget Responsibility mostly concurs with the chancellor, citing the eurozone crisis and high oil prices as bigger menaces to growth than his austerity. The economy’s recent signs of life – growth of 0.3 per cent in the last quarter, forecasts for something similar in this one – are a political problem for Keynesians who believe austerity has caused Britain’s stagnation. “Fiscal multipliers don’t explain why things are getting better now,” says a Treasury official.
But if global events decide so much in the UK, there is not much reason for the optimism coursing through the country’s body politic. Too many things can still go wrong. When Mr Osborne rose for his Mansion House speech in London last week, Shinzo Abe, the Japanese prime minister, had just concluded an address of his own nearby. The coincidence should have reminded the chancellor of one of the several unexploded bombs capable of disrupting the recovery.
Japan, the world’s third-largest economy, has a gross debt approaching 230 per cent of its gross domestic product, as well as a government and central bank committed to raising inflation expectations. Abenomics excites nervousness in Asia and beyond, though financial markets have cheered its onset. At the same time, the great unwinding of quantitative easing by the US Federal Reserve is rattling investors before it has even begun. The early intimations of credit tightening are affecting China, too. As for Europe, only the chronically sanguine have stopped worrying about the euro. If markets suspect the European Central Bank’s commitment to buy troubled member-state bonds as only a theoretical backstop – and German opposition hardly discourages that suspicion – the saga may resume.
Global convulsions trouble any economy but smaller, open ones such as the UK are doubly vulnerable. When Mr Osborne announces his spending round for 2015-16 on Wednesday, he will say Britain is moving from “rescue to recovery”. He would be wise to invoke another R: risk. The world teems with dangers. If the country’s politicians are sentient of that dark reality, they are hiding it well.
It is hard to exaggerate how seriously Westminster has taken the recovery. Growth has roused the Conservatives and disconcerted the Labour party, some of whose frontbenchers expected a triple-dip recession to do for Mr Osborne, and by implication the government. When it failed to occur, Labour’s complacency dissolved. The party has toiled ever since to win economic credibility.
All of this has helped Mr Osborne to convalesce after an ignominious 2012, when he botched a Budget and oversaw three quarters of contraction. His political bloodlust has returned. The Tories’ lackadaisical backroom operation has improved since he ordered staff to go after Labour more tenaciously. In April he led an attack on welfare dependency from which the opposition has never really recovered. And this month Labour accepted the fundamentals of his fiscal policy. Even those convinced that Mr Osborne is a strutting dilettante who treats high office like a game of his beloved backgammon cannot deny that British politics now takes place within parameters set by the chancellor.
But resurgence can lead to hubris. All the political excitement of recent months is based on one quarter’s growth figures, which itself owed something to a precious period of relative quiet in the world economy. Call it irrational exuberance. It may turn into something more durable, but Mr Osborne must work on the assumption that it won’t.
As a purely economic event, Wednesday’s spending round means little. It deals with one fiscal year and saves just £11.5bn, a sum that amounts to less than a 10th of the current deficit. But as a bully pulpit from which to send a message about the British economy, it is priceless. Mr Osborne does not want to talk down a recovery that depends on confidence, but making too much of it will leave the electorate unprepared for any external shocks that thrust Britain back into recession. It will also put Mr Osborne’s credibility at the mercy of events.
Faced with this dilemma, he should veer towards caution. The chancellor is at his best when at his bleakest. His bottomless unpopularity perversely makes him an authoritative messenger of bad news, like a doctor who does not bother affecting a bedside manner. His worst moments have been attempts to soften the truth: his meteorological excuses for the economic contraction of winter 2010, the veiled tax increases in his 2012 Budget, his failure to warn voters upon taking office that recovery could be feeble and fitful. On Wednesday, he must summon the flinty candour that more becomes him.
Yes, the economy is healing. It was never quite as sick as once thought: the double dip of 2012 has almost been revised out of existence by official statisticians. But the recovery is a fledgling thing liable to be snuffed out by global rumbles that no chancellor can do much about. Cynics would accuse him of getting his excuses in early. Admirers would call it far-sighted. Either way, it would be honest.
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