Mr Osborne turns a corner

 
George Osborne speaking on 9 September

The chancellor isn't declaring victory on the recovery just yet - he's too careful for that. But he is declaring victory over Ed Balls, and in his speech today he said the UK economy had "turned a corner".

He might well be right about the recovery. Whether he's also right about Ed Balls depends on which version of the Labour argument you decide to go with.

Let me start with the bit about where we are now.

Though the chancellor's right to be wary of future ups and downs, there is clearly a lot more momentum in the UK economy now than there was at the start of the year.

If you mechanically plug recent survey data into most independent models of the economy, you get a forecast for growth in the third quarter in the region of 0.9% to 1.0%, which is somewhat higher than the 0.7% growth we saw in the three months to June.

Some city economists think that's simply too good to be true, and they've tweaked their models accordingly. But even fairly conservative forecasters now expect annualised growth rates of more than 3% over the second half of this year.

That's not unusual in the early stages of a recovery, but it's downright eye-popping compared with where we've been.

What is more, as I discussed last week, this recent growth appears to have been of the "right kind".

Positive contribution

You'll remember, in the early summer, the figures suggested that nearly all of the growth we had seen since 2010 had been financed by falling household savings and spending rather than investment and exports.

Over the entire three years, that is still true. But now we know that exports made a positive contribution to growth in the first three months of this year and in the second quarter as well, though the latest trade figures after that, for July, were pretty dire. The most recent numbers also show manufacturing and construction playing a bigger role.

You would still say, looking at the trade deficit and the investment numbers, that the economy was seriously imbalanced.

But the chancellor is right that the recovery is starting to look much more balanced than it was. That is good news indeed.

And the political argument on austerity; do these encouraging figures show he's right on that, as well?

As ever, there is no black and white here, but Mr Osborne's speech makes a serious case. The argument is fairly subtle: he talks about the fiscal multipliers, for example. But it boils down to this:

  1. Ed Balls always said that austerity stalled the recovery in 2010
  2. He also said that the government would need to change course for growth to come back
  3. The government - and the Office for Budget Responsibility, among others - always said it was external factors such as the eurozone crisis and higher prices that made our recovery so slow
  4. Now those external factors have receded and UK growth has accelerated sharply, even though there there has been no let-up in the pace of austerity.

So, the government was right, and Ed Balls was wrong, both about the cause of the slowdown, and the best way to overcome it. QED.

Strong cases

Put that way, it's a strong case. And you can imagine that is exactly the case that ministers will be making, every minute between now and the election.

In reply, Mr Balls will say:

  1. He never said that austerity was the only thing holding back the recovery
  2. Nor did he say that recovery was impossible without Plan B, though observers would say he came pretty close
  3. There have been many factors holding back growth since 2010, including the eurozone crisis. If several have now receded, Balls will say, it's no surprise to see the economy bounce back in response
  4. He would also probably point out that the government has borrowed a lot more than it expected since 2010 and to that extent there has indeed been a Plan B. The pace of spending cuts is also set to slow this year
  5. The Labour argument for putting forward Plan B was, rather, that the government should have been looking to offset those negative forces, rather than making them even worse, with budget cuts, and waiting for all those deflationary forces to take their course.

Both sides make a strong case, which depends, to some degree, on making a straw man of their opponent. The point, as I suggested a few months ago, is that this is now an argument about the past, which the public will care about less and less.

Maybe things would have been better, the past few years, with a different chancellor at the helm. Maybe they would have been worse. We will never know.

Given this uncertainty, some economists would say it was complacent for Mr Osborne to leap on the recent momentum in the economy as proof that there could never have been better way out of the financial crisis than the one he has followed. That has not been proved. It never will be, either in favour of Ed Balls or George Osborne.

But that economic momentum is real enough, and you have to bet it will translate into momentum of the political variety for the government as well.

The argument about Plan B is over, give or take. The argument about the best way to rebuild UK living standards is just getting going.

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

Read full article

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    -1

    Comment number 226.

    2.AndyC555

    "when things really improve"

    ===

    What things, and how?

    Highest rents, lowest job security, longest hours, among the worst education etc. etc, in the EU.

    Yes, you can up the GDP a bit, by precaritising millions into near-slavery.

    Don't expect them to say "thanks" though.

  • rate this
    0

    Comment number 225.

    This is, of course, ignoring the trillions in otc derivatives contracts, still being passed around like the hot potato they really are.

  • rate this
    0

    Comment number 224.

    @217 Justin150
    Thanks for the explanation. There was no suggestion of bias!

    The long-run average tax take is not quite as stable as you suggest. In any event, if you look at total public expenditure, you should also look at total income, which was 42.2% of GDP in 2012, according to Eurostat. With expenditure at 48.5% of GDP, that's 115% of income. In 2007, public expenditure was 106.4% of income.

  • rate this
    0

    Comment number 223.

    Labour & especially Balls made a major mistake implying Govt policies would prevent recovery. Govt policy can affect the rate of recovery & the amount of permanent damage done to the economy & the damage done to people but in the end, no matter how incompetant, the business cycle will prevail, can't stop a boom any more than a bust only moderate the amplitude. should have read his Keynes

  • rate this
    0

    Comment number 222.

    @191.rememberdurruti
    .. It lays bare the dire state of the nation’s finances in the wake of the 2007 financial crash, which has seen government debt double in just five years

    If you accept the Govt line that public sector debt is a, if not the, huge problem, which they're now keeping quiet on because it doesn't suit their current political agenda,

  • rate this
    +2

    Comment number 221.

    Incredibly partisan contributions to this article. Perhaps not surprising taking into consideration the overtly political nature of GO's speech.

    Seems Tory Party Central Office have the upper hand on organised blog contributors by numbers & voters. Perhaps a sign of the election Tory machine under Lynton Crosby? Moderator?

  • rate this
    +2

    Comment number 220.

    The argument about Plan B is over, give or take
    /
    I don't think it is over by a long shot.
    If plan B is investment for growth and rebalancing of economy and plan A is doctrinaire austerity and tax cuts with no rebalancing and plenty of quick fixes then plan B will come back into fashion eventually.

  • rate this
    +1

    Comment number 219.

    193 Paul
    "They still ruthlessly exploit the confusion between the deficit, which was their fault, and the banking crisis"

    The banking crisis caused the banks to make a loss, which in turn reduced tax revenue from the banks, increasing the deficit. It also caused the banks to call in their loans putting companies out of business and reducing tax revenue further.

  • rate this
    +2

    Comment number 218.

    Osborne's Plan AB: -
    Austerity for the poor.
    Borrowing to fund the rich.

    Which party offers sound money and investment for productivity?
    Thought not!
    Just false promises all round.

  • rate this
    0

    Comment number 217.

    #208 I get my figures from the Guardian newspaper so I cannot be acused of right wing bias.

    Long run average tax take in UK is 35-35.5% of GDP (stable for over 50 years).
    2007/8 Public sector spending was 41% of GDP, during rescession public sector peaked at 48% of GDP, for 2013 public sector spending is 43%.

    In each case divide the public sector spending %age by 35.5 and you get my numbers

  • rate this
    0

    Comment number 216.

    @212.Mark Potter
    Mr Balls might of course be right in suggesting it was all down to external factors

    ---

    Mr Balls has spent the past three years denying the external factors.

  • rate this
    +2

    Comment number 215.

    @125.
    Up2snuff


    The dear old Beeb has been brave & risked an invasion of Tory trolls on Steffie's Blog today that is all too obvious. ;-)

    Totally agree thats because they have been trounced on the main news story on HYS, on the same theme. !!!

    http://www.bbc.co.uk/news/business-24011795

  • rate this
    0

    Comment number 214.

    Nothing wrong with austerity but all that Mr Osborne was asked to do was balance the books and eliminate the fiscal deficit. This he has not done. There has been a squabble with a Big State Labour theorist Labour who was responsible for running a GBP 72 billion deficit at the height of the boom. I can't see why Mr Osborne feels the need to crow over that piece of nonsense.

    There is no recovery.

  • rate this
    +1

    Comment number 213.

    @33.
    Anthoncon


    All Ed Balls wants to do is borrow, borrow, borrow. When will he realise that wealth is created by the private sector.

    Not totally true the state does have some industries which turn a profit, take the east coast mailnline making a nice 600 million, where the private sector failed, just another private sector good, public sector bad wheeze. !!!

  • rate this
    0

    Comment number 212.

    As Tolstoy wrote 150 years ago history awards the plaudits according to the results, not according to what the participants actually did personally. So if we get a sustained recovery, in time Mr Osborne will be regarded as the clever one. Mr Balls might of course be right in suggesting it was all down to external factors, but no one will give him any credit for that in the long run.

  • rate this
    +2

    Comment number 211.

    ConDemLab

    They have followed the same policy House price inflation = higher stamp duty receipts for Govt.

    The base rates need to rise for the correction to happen and in turn a stustained recovery. The only soulution but is is not going to happen.

    More FFL and HTB - more House price inflation.

  • rate this
    -1

    Comment number 210.

    Cameron was bruised over Syria. Cynical Osborn made his claims about the economy attempting to shore up the flagging fortunes of the Tories. I am surprised economists have fallen for it. Population HAS INCREASED over the past 3 years so growth of 1.8% instead of Osborne's forecast of 6.8% and borrowing staying the same can be said to be good news for us all as well as living standards falling!!!!

  • rate this
    0

    Comment number 209.

    LadyEcon@206

    It can be so, but I don't take offence, and not being an Economist or Politician I find the black arts an amusing and naïve grey piano.

    Stephanie explains boring statistics and even more boring economic theory very well and with enthusiasm, for which I am very appreciative, but it must be very difficult to write about economics in the modern UK without straying into politics.

  • rate this
    0

    Comment number 208.

    @197 Justin150
    Not sure where you get your figures from, but my calculations differ. For the year ended 05/04/2013, Government receipts were just shy of £550 bn; for a deficit of nearly £120 bn, expenditure would be nearly 122% of receipts (rather than your 135%). For 2007/08, my calculations give 108% (rather than your 115%).

  • rate this
    0

    Comment number 207.

    Growth per capita is the metric that will track peoples feel good factor. But as the previous BoE governor almost said.....I'll publish that just as soon as someone tells me what the population is quarter by quarter....

 

Page 1 of 12

 

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.