Osborne has defeated Ed Balls – but UK’s economy still fragile

 
Allister Heath

WITH the economy finally growing much more quickly, it is no surprise that the chancellor chose yesterday to show off about it. He is certainly right to be celebrating having seen off Labour’s Ed Balls, whose strident opposition to modest cuts and claims they would inflict permanent havoc are no longer credible.

Osborne is also right on one important additional matter: over the past two or three months, the recovery appears to have become broader and slightly less unbalanced, with construction finally beginning to grow again after a catastrophic bust. Every part of the economy seems to be rebounding, which is excellent news.

But there are still huge problems ahead and many of the claims Osborne made yesterday were overoptimistic. The housing bubble that the chancellor is busily reflating is far from sustainable; the budget deficit will hopefully be coming down now that growth is accelerating but remains extremely large; our low savings rate is a major problem (even if the data from earlier this year showing a further fall was probably depressed by bonuses being shifted into this tax year to benefit from the 45p rate); and investment remains at ultra-low levels, depressing productivity. Yes, we’re getting lots of growth again – but nearly all of the old structural problems remain.

Take the claim that exports have been driving part of the recovery during the past two quarters, and that all is therefore well. While true on the face of it – though two quarters of preliminary data doesn’t tell us much – the problem, as Berenberg Bank points out, is that much of the net exports’ contribution to growth in the first half was actually due to oil, which is in structural decline. The latest trade data for July were also pretty poor, undoing all the progress over the past six months.

Or take the claim that 90 or 95 per cent mortgages are not exotic weapons of mass financial destructions – of course, the chancellor is right, but only when house prices are fairly valued. The more over-valued and expensive they are, and the more likely an economy is to face a shock which would suddenly prevent many borrowers from repaying their mortgages, the riskier it is to have small deposits – lenders might have to end up repossessing homes, and writing off vast amounts.

With prices still too high compared with earnings nationally and especially so in London and the south east, and market interest rates now starting to shoot up, it makes sense to be prudent. The chancellor also seems to forget that it was his own banking regulations that have discouraged high loan to value mortgages. It was also strange to see him boasting about cheap mortgages – and how his policies have further lowered their cost – just as rising market rates are actually starting to force lenders to hike their fixed-rate mortgages.

But at least the debate about the economy has moved on. The worry now is whether we are enjoying the wrong kind of growth – the sort that feels good at first but ends in tears.

ALL OVER THE PLACE
BRITS are an ideologically eclectic bunch. Traditional concepts of “right” and “left” have always been meaningless in politics – but as the findings of the 30th British Social Attitudes survey reveals, nowhere more so than in contemporary Britain.

Most voters are simultaneously on the right and on the left, depending on the issue; many back a kind of anti big business, pro-NHS, anti-politician, anti-EU, anti-welfare, pro-self-reliance, anti-rich set of Poujadist policies, laced with a big dose of atheism and sexual and racial tolerance. To those with neat and tidy ideological minds, such a package of seemingly contradictory beliefs makes little sense. But those seeking to lead and mould opinion had better get used to it.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath