Mr Osborne turns a corner
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".
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:
- Ed Balls always said that austerity stalled the recovery in 2010
- He also said that the government would need to change course for growth to come back
- 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
- 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.
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:
- He never said that austerity was the only thing holding back the recovery
- Nor did he say that recovery was impossible without Plan B, though observers would say he came pretty close
- 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
- 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
- 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.