Weak U.K. Growth Underlines Case to Slow Down Budget Cuts, Balls Says
The U.K. government appears “paralyzed” with the economy at risk of sliding back into recession, said the opposition Labour Party’s finance spokesman, Ed Balls, renewing an attack on the pace of deficit reduction.
Balls will step up his demands for Prime Minister David Cameron and Chancellor of the Exchequer George Osborne to adopt a Plan B when Labour activists gather for their annual conference next week in Liverpool, northwest England.
“They need to act but they seem paralyzed in the face of the facts,” Balls said in a telephone interview yesterday. “No growth and rising unemployment are very bad for deficits. This is not simply a sovereign-debt crisis, it’s a global growth crisis. We can’t have credibility without growth.”
The International Monetary Fund cut its 2011 and 2012 U.K. growth forecasts this week to 1.1 percent and 1.6 percent respectively, and the head of the government’s fiscal watchdog, the Office for Budget Responsibility, signaled he was likely to follow suit.
Bank of England officials are already considering restarting their bond-purchase program and the junior coalition partners, the Liberal Democrats, are discussing the need to speed up capital spending to boost flagging demand.
Figures released last week showed unemployment increased by 80,000 in the May-to-July period from the previous three months as measured by the internationally agreed gauge. Gross domestic product expanded just 0.2 percent in the nine months through June and gauges of manufacturing, services and construction growth all declined in August.
Conference Season
Labour’s annual get-together is taking place between the conferences of the two parties in the governing coalition: the Liberal Democrats, who held their conference this week, and Cameron’s and Osborne’s Conservatives, who convene Oct. 2. Both have taken every opportunity to blame Labour for the country’s economic woes.
“Labour got us into this mess,” the Liberal Democrat leader, Deputy Prime Minister Nick Clegg, told his party in Birmingham Sept. 21. “Labour’s economy was based on bad debt and false hope. Don’t forget the chaos and fear of 2008. And never, ever trust Labour with the economy again.”
Labour Prime Minister Gordon Brown and Chancellor Alastair Darling ran up a record deficit of 11 percent of GDP after the financial crisis plunged Britain into its worst recession since World War II. After ousting Labour at the May 2010 election, the coalition opted for one of the tightest fiscal squeezes among developed nations, with the forecast loss of more than 300,000 public-sector jobs, in an effort to balance the budget.
AAA Rating
Osborne has rejected Balls’s suggestions of cuts in sales tax and increased infrastructure spending to provide a spur to growth, arguing that the priority is to narrow the budget gap and retain Britain’s top credit rating.
For Alan Clarke, chief U.K. economist at Scotia Capital Europe Ltd. in London, the strategy is paying off.
“In relative terms the U.K.’s not doing that much worse than our counterparts,” Clarke said in a telephone interview. “Most importantly, the U.K. has convinced the market to give it the benefit of the doubt. We’ve got safe-haven flows, and that’s priceless.”
The government argues its deficit-reduction program is shielding Britain from the debt crisis engulfing the euro region, pushing down U.K. borrowing costs to record lows in a boost for consumers and companies. Ten-year gilts yielded 2.35 percent as of 10:30 a.m. in London today, compared with rates of more than 5 percent on Italian and Spanish government debt.
‘Credit’ With Investors
“I think we’re getting credit in the market for having a clear and properly thought-through plan and we will stick to delivering that plan,” Transport Secretary Philip Hammond said in an interview with Bloomberg Television from Hong Kong today. “Of course in parallel with that we need to stimulate economic growth.”
Balls argues the fall in yields reflects a darkening view of the economy. “The reason why long-term interest rates are so low is less about safe-haven flows and more about deep market pessimism,” he said.
The recent poor economic news has led Liberal Democrats within the Cabinet to float in private the possibility of bringing forward capital spending, according to a lawmaker familiar with the discussions. The BBC reported Sept. 20 that ministers were discussing increasing the infrastructure budget by as much as 5 billion pounds ($8 billion), without saying where it got its information.
Potential Damage
Osborne is resistant to such arguments, according to two coalition lawmakers familiar with his thinking, and takes the view that any stimulus from looser fiscal policy would be outweighed by damage done from rising interest rates if investors doubted his commitment to spending cuts.
“Five billion isn’t going to save us,” said Clarke. “It’s 0.3 percent of GDP. It’s not even going to touch the sides. If we lost the faith of the bond market the situation would be considerably worse.”
Even so, Philip Shaw, chief economist at Investec Securities in London, said he could imagine a time coming when the Treasury decided to change course.
“There’s a juncture where the thing to do is say it’s appropriate to ease fiscal policy, because it’s the least-worst of the options,” he said in a telephone interview. “We’re not there yet. But it would be surprising given what’s happening if the government wasn’t thinking ‘what if?’”
To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net;
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net.
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