Excitement has risen in Britain over the past week that the economic downturn is petering out. UK manufacturing output was flat in March and rose in April.
Surveys of service sector companies show even greater optimism. House prices appear to be bouncing along the bottom rather than in freefall. And the majority of City economists in an FT poll thought the recession was over for now.
But sitting in his spartan Treasury office, Alistair Darling remained cautious. “I think it is important that people should not become complacent,” said the chancellor of the exchequer.
Politicians never say that now is the right time for complacency, but despite his efforts not to let recent data lead him towards concluding the worst is over, Mr Darling certainly feels his actions, and those of the government more generally, are now working to limit the recession.
“The measures that we took promptly – and which were bitterly opposed by the Tories [the opposition Conservatives] at the time – I always said they would have an effect and they are having an effect.”
There is no doubt he sees a delayed recovery in other countries as the big risk to Britain’s recovery. “If you look at the challenges, most of them are global,” he said. The two big risks were getting bank lending going again and the rising oil price.
Although he acknowledged that the UK and the US still had more work to do on banks, he pointed to other European economies that now had to cleanse their banking system of toxic assets and help to restore confidence.
Citing this week’s report from the International Monetary Fund as evidence that this was not just a British concern, he added: “If you don’t fix the banking problem, you’ll never fix the wider economy.”
This is the message the chancellor will be taking to the Group of Eight finance ministers’ meeting in Italy this weekend. It is one that will be received frostily among some of his continental European peers, as they blame Anglo-Saxon countries for the banking crisis and global recession.
While Mr Darling was clear that the IMF’s analysis was correct in saying “there was still more to be done in terms of European banks”, he was less pleased with its recent advice to the UK to speed up the consolidation of the gaping budget deficit. “Any watchdog will always tell you to do something quicker,” he snapped.
The chancellor was quick to criticise what he saw as Conservative plans to cut public spending by 10 per cent, but he did not follow the tactic of Gordon Brown, prime minister, of claiming public spending under a Labour government would be bountiful because the longer-range budget forecasts showed spending rising on figures not adjusted for inflation.
“I have always been clear that just as we support the economy now, in the medium term we have got to live within our means and I set out a clear commitment to halve the deficit over a five year period,” he said.
The Treasury has calculated that 80 per cent of that deficit reduction comes from cuts in public spending plans – and particularly a savage cut in future capital expenditure projects – rather than tax increases.
It was this focus on spending reduction that received praise from the IMF in its recent assessment of the UK economy. Fund officials said: “The emphasis in current plans to weigh the adjustment toward expenditure reduction is appropriate”.
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