George Osborne has admitted the economic recovery will “take longer and be harder” than expected but he gave MPs a bullish account of Britain’s readiness to withstand what he said were the most dangerous economic conditions since 2008.
This was the chancellor at his most self-confident, claiming vindication for his decision to crack down on Britain’s debt and boasting that he was leading the world’s response to the crisis. Ed Balls, Labour’s shadow chancellor, said Mr Osborne was either “deeply complacent or in complete denial”.
The Commons was packed on Thursday to hear Mr Osborne’s account of events that had unfolded while he was on holiday in California, including the spread of the sovereign debt crisis to Italy and Spain and the chaotic scenes in Washington on how to tackle the US deficit.
“Instability across the world and in our main export markets means that, in common with many other countries, expectations for this year’s growth have fallen,” he said.
The chancellor’s biggest fear was that the eurozone sovereign debt crisis would knock over weak banks on the continent, spreading fear and paralysis through the banking system. But he insisted Britain was ready: “We have in place well-developed and well-rehearsed contingency plans.”
He added: “I can confirm that the assessment of the Bank [of England], Financial Services Authority and Treasury is that British banks are sufficiently well capitalised and are holding enough liquidity to be able to cope with the current market turbulence.”
Mr Osborne’s use of the word “current” was significant; his offer to brief Mr Balls on contingency planning was a sign that Britain’s economic leaders were braced for another possible banking crisis if the chaos in the markets escalated.
The chancellor insisted to MPs that he had done everything possible to prepare for the worst by hammering down the deficit and allowing the Bank to keep interest rates close to zero.
He pointed out that Britain’s credit default swap spread – the price of insuring against a sovereign default – was lower than Germany’s, and added: “The market for our government bonds has benefited from the global flight to safety.”
However, Mr Balls reminded the chancellor that the Japanese finance ministry in the 1990s initially also saw falling bond yields as a vote of confidence in the country’s economic stability but they turned out to be a harbinger of a prolonged period of stagnation.
He claimed Mr Osborne’s cuts went “too far and too fast” and had ripped out the foundations of the economy. “However many times he says his plans are working, it doesn’t make it true,” he said.
But Mr Osborne believes recent events have left Mr Balls’s call for a loosened fiscal stance look absurd. “I did meet Mickey Mouse in California and he seems to be writing Labour’s economic policy,” he said.
There was heckling from the Labour benches at Mr Osborne’s insistence that the government would “continue to lead the international response in Europe and beyond”. The chancellor had previously made a virtue of the fact he was excluded from key eurozone meetings.
Now he appeared emboldened by political weakness in the US and Europe and apparent market endorsement of his policies to take a lead as an advocate of global fiscal rectitude and eurozone political reform.
Get alerts on UK coalition government when a new story is published