Osborne Wins Reprieve as Britain Escapes Triple-DipGonzalo Vina and Robert Hutton
Chancellor of the Exchequer George Osborne won a round in his defense of austerity yesterday as Britain escaped a triple-dip recession.
The 0.3 percent expansion in economic output in the first quarter, three times more than economists had estimated, allows Prime Minister David Cameron to deflect criticism from his closest lieutenant, whose deficit-cutting strategy has been the cornerstone of their policy, from within the Tory party.
“This buys him some time but, politically, this debate will go on and on and will only make things better for a week or so,” Stephen Driver, a professor of politics at Roehampton University in London, said in a telephone interview. “Unless something goes seriously wrong, it would be a political disaster for Cameron to replace Osborne because it would be a signal that the government is not working.”
Cameron and his Liberal Democrat coalition partners have made austerity the glue that binds the government together, resisting calls from some Tory lawmakers to do more to spur growth at a time when the economy remains mired in a slump.
Osborne is instead relying on the Bank of England’s 375 billion-pound ($579 billion) quantitative-easing program, interest rates at a record low, and this week’s expansion of a plan to provide cheaper loans to consumers and companies to support the economy. When the central bank’s new governor, Mark Carney, starts work in July, he’ll have a wider remit to loosen policy.
Yesterday’s growth figure provides relief for Osborne and Cameron a week after Fitch Ratings stripped the U.K. of its top credit grade, becoming the second company to do so, and the International Monetary Fund called on Osborne to relax his fiscal tightening.
“I can’t promise the road ahead will always be smooth, but by continuing to confront our problems head on, Britain is recovering and we are building an economy fit for the future,” Osborne said.
The pound soared against the dollar after the data were published and was up 1.1 percent on the day at $1.5434 as of 6:05 p.m. in London. The FTSE 100 Index added 10.83 points, or 0.2 percent, to 6,442.59 at the close. The yield on the benchmark 10-year gilt rose four basis points, or 0.04 percentage point, to 1.73 percent.
“We are not by any means there, but we can see light and the end of the tunnel,” Tory lawmaker Robert Halfon said yesterday in a telephone interview. “Today’s news is a step in the right direction and, while I don’t agree with him on everything, Osborne is right.”
While the U.S., German and Canadian economies are back above their pre-recession levels, U.K. GDP remains 2.6 percent below its peak in the first quarter of 2008. It means Britain remains stuck in its longest peacetime slump since at least 1920, according to the National Institute of Economic and Social Research.
Since Cameron took office, the U.K.’s FTSE 100 Index has returned 36 percent, lagging behind the Standard & Poor’s 500 Index’s 46 percent, while outgaining benchmarks in Canada, France and Germany.
The economy has grown 1.2 percent since the third quarter of 2010, just after the coalition came to power in May of that year. Osborne’s opposite number in the Labour Party, Ed Balls, called the latest growth data “lackluster.”
Osborne “has avoided another hurdle although I don’t think his job was at risk,” Andrew Russell, a professor of politics at the University of Manchester, said in a telephone interview. “He will be very pleased but he has been very cautious.”
Just like Labour’s Tony Blair and his chancellor, Gordon Brown, a decade ago, Cameron and Osborne’s fortunes are intertwined and often stand against the rest of their party.
The two Tories are bound together not just by their economic policy but by their political philosophy. While they both attended Oxford University and were both members of the exclusive and riotous Bullingdon dining club, they weren’t contemporaries, and didn’t come to know each other well until they were both elected to Parliament in 2001.
Osborne ran Cameron’s campaign for the Conservative leadership in 2005. As Tory party modernizers, they spent the period until the 2010 election aiming to make the Conservatives electable following three consecutive defeats to Blair.
It’s a policy both men have continued while in government even though it’s at times put them at odds with their rank-and-file. Osborne has spearheaded efforts to get his party to support gay marriage in the face of opposition from Tory traditionalists. Similarly the chancellor has failed to give tax breaks to encourage marriage, facing down demands from the Tory back benches in the Commons.
Osborne is a regular user of his office in 11 Downing Street, next door to Cameron’s official residence at No. 10. Internal doorways mean his desk is a short stroll from the prime minister’s.
Brown was a rarer user of No. 11, preferring to stay at his desk in the Treasury and avoid Blair. The pair had shared an office when they were first elected to Parliament for Labour in 1983, in a relationship that Blair, in his memoirs, compared to the intensity of a love affair.
That soured in 1994 when Blair overtook Brown to become Labour leader. Once they took power in 1997, Brown ran economic policy with barely any reference to Blair, who feared the consequences of firing his chancellor.
“The difference with Blair and Brown is that Brown was the most coherent alternative to Blair in the Labour Party,” said Manchester University’s Russell. “It’s not a shift from George Osborne that the Tories would be seeking, but something different altogether,” were Cameron to consider changing course.
Any temptation on Cameron’s part to abandon austerity may be tempered by the memory of Edward Heath, the Tory prime minister from 1970 to 1974. In the face of rising unemployment, he u-turned in 1972 and adopted stimulus measures. While they worked in the short term, they didn’t stop him being turned out of office.
The authorized biography of Margaret Thatcher, published this week, shows the political calculations in the mind of a prime minister. After the Argentine invasion of the Falklands in 1982, Defence Secretary John Nott was determined to resign. Thatcher resisted, according to the author, Charles Moore, because “she feared that the departure of the only other Cabinet minister apart from herself who had been involved in the debacle would leave her own position vulnerable.”
Still, the pressure on Osborne over his handling of the economy is likely to persist in part because of his growth record since taking office.
Growth is “not out of line with the pattern of the last few quarters, an upward trend but a shallow one and quite bumpy,” the Office for National Statistics’ chief economist, Joe Grice, told reporters.
A month after Osborne became chancellor, the Office for Budget Responsibility that he set up forecast that the economy would grow by 8.2 percent in the three years through 2013. That prediction is now for an expansion of 1.9 percent. The Bank of England’s February projections show GDP will not return to its pre-recession peak until the fourth quarter of 2014, so a depression of almost seven years.