Is U.K.’s Finance Minister More Lucky Than Good?

The budget statement U.K. Chancellor of the Exchequer George Osborne made on Thursday was a reminder of why politics in the mother of parliaments is such good fun. The House of Commons was a roaring bear pit, and Osborne’s speech left the Labour Party’s economics spokesman red-faced and flailing. It was classic parliamentary pantomime.

Showbiz aside, Osborne has been lucky: For the first time since he took office in 2010, the economic news in Britain is good. The U.K. is expanding faster than any other large developed economy, and Osborne gleefully took the credit. Look a little closer, and there’s a bit less to celebrate.

The U.K. is finally bouncing back from a ferocious recession. Its unduly delayed recovery will improve the fiscal position all by itself; the policy changes announced this week contribute almost nothing to the expected decrease in public borrowing. The timetable for turning the underlying budget deficit to surplus now stretches to 2018-2019, four years beyond the target Osborne first set himself.

More important, this U.K. recovery is badly unbalanced. The U.K.’s growth depends entirely on consumer demand and credit, while investment and net exports are lagging -- just as before the crisis. There are signs of a new debt-based property bubble (the average price of a house in London is up 10 percent over last year), which Osborne helped inflate with a mortgage-guarantee program called Help to Buy. Britain needs a recovery based less on household debt and more on public investment.

The chancellor’s statement wasn’t entirely confined to embarrassing the opposition. He took steps to address some of the U.K.’s longer-term problems -- proposing, for instance, to raise the retirement age more than 30 years from now, and to introduce a fiscal cap that governments in the future would have to secure parliamentary support to break. Both are sensible long-term moves, but neither will do anything to rebalance the current recovery.

Osborne’s strategy is to carry on being lucky. All will be well if this catch-up recovery lasts long enough for the U.K.’s main export markets in Europe to revive; if the private sector decides to start investing heavily and makes big bets on infrastructure projects the government wants but won’t pay for; and if labor productivity recovers the 15 percent it has lost from its pre-crisis trend. Above all, Osborne and his boss, Prime Minister David Cameron, hope to be lucky in another way: At this rate, despite lagging in the polls, the Conservatives might get re-elected in 2015 after all. It’s enough to make Labour splutter.


To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.