Osborne Hails ‘Haven’ U.K. as He Vows No Compromise on Deficit Reduction

U.K. Chancellor of the Exchequer George Osborne said his deficit-reduction program will remain in place after growth stumbled in the second quarter, keeping up pressure on the Bank of England to maintain emergency stimulus.

His plan to eliminate the structural budget deficit by 2015 is making the U.K. the “safe haven in the storm” that is battering other European economies, Osborne said after figures today showed the economy grew 0.2 percent in the three months through June.

The expansion was half the 0.4 percent predicted by the Office for Budget Responsibility in March and raised fresh questions about whether the government can achieve its forecast of 1.7 percent growth in 2011. Gross domestic product remains almost 4 percent below its pre-recession peak in early 2008, ahead of only Japan and Italy among Group of Seven countries.

“If we continued with this weakness in the second half of the year then you could give greater weight to the argument for more stimulus” from the Bank of England, said Stewart Robertson, chief European economist at Aviva Investors in London.

Osborne so far has refrained from expressing a view on whether the Bank of England should seek his permission to expand its 200 billion-pound ($320 billion) program to inject money into the economy by buying government debt.

Business Secretary Vince Cable called on the central bank this week to expand money supply if demand continues to falter. His comments came after Ernst & Young LLP’s Item Club, which uses the same forecasting model as the Treasury, cut its 2011 growth forecast to 1.4 percent from an April projection of 1.8 percent.

Bank Independence

Asked whether he agreed with Cable, Osborne told BBC television today that “we shouldn’t be trying to second guess” the decisions of the independent central bank.

Economic output in the second quarter was barely higher than it was between July and September last year. Office for National Statistics Chief Economist Joe Grice today agreed with reporters when asked whether the economy had flat-lined in the last nine months.

“In terms of the actual figures, that’s probably right,” he said, even though one-time effects related to the royal wedding, the Japanese earthquake and a warm month in April may have shaved off as much as 0.5 percentage point off output.

More Weakness

The weakness is likely to persist, said Stephen Lewis, chief economist at Monument Securities in London. Osborne won’t ditch his plans and calls for more asset purchases are unlikely to garner enough support among Bank of England policy makers.

Jonathan Portes, director of the National Institute of Economic and Social Research in London, said the government should tax less and spend more to stimulate demand.

“The correct thing for the government to do is to ease fiscal policy -- it’s too tight,” he said. “Monetary policy operates with long and variable lags so it’s no substitute for the short-term boost that’s needed.”

The opposition Labour Party says Osborne is undermining the recovery by trying to cut the deficit too fast, with January’s increase in sales tax and the prospect of years of austerity sapping consumer confidence at a time when inflation is imposing the biggest squeeze on living standards since the 1970s.

“These figures show that last year’s recovery has been recklessly choked off by George Osborne,” said Ed Balls, the Labour lawmaker who speaks on Treasury affairs. “The economy has effectively flat-lined for nine months.”

Osborne rejects the argument, saying that his commitment to tackling a deficit that reached 11 percent of GDP in the aftermath of the recession is keeping market interest rates in Britain low.

“Our economy is stable at this time because this government has taken the difficult decisions to get to grips with Britain’s debts,” Osborne said today. “Abandoning that now, as some argue we should, would only risk British jobs and growth.”

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net

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