Despite a real threat from the
euro crisis, our strategy of deficit reduction is still the only sensible course
After
last week’s fall in unemployment we’ve had some more good economic news today.
Inflation has fallen a full half a per cent to three per cent. For the first
time since 2009, the Governor of the Bank of England has not had to write a
letter to the Chancellor to explain why inflation is above his target range.
What’s more, data on the public finances published this morning show that
government borrowing fell even more than was thought last year, so that in just
two years the Coalition Government has reduced Britain’s deficit by more than a
quarter.
That doesn’t make the headlines about the euro go away. Back in
2010, this Coalition Government was formed against the backdrop of a eurozone
crisis. Two years on and you’d be forgiven for asking if anything has changed.
There
is one crucial difference, however. Two years ago people were asking whether
Britain would join the growing list of countries in crisis. International
investors were questioning our ability to deal with the huge debts that were
built up in the boom times and then exposed as unsustainable in the bust. That
is no longer true. Our record low interest rates are a tangible sign that
investors around the world once again believe in Britain. Many economic
problems remain, but our deficit is falling, inflation is falling, unemployment
is falling, and we are laying the foundations for better times ahead.
As
Chancellor of the Exchequer, I would say that. But you don’t just have to take
my word for it. Today the two most respected international organisations that
look at the British economy have passed their verdicts: the managing director
of the International Monetary Fund, Christine Lagarde, has come to town to
deliver the IMF’s annual report card on the British economy; and this morning
the Organisation for Economic Cooperation and Development published its
Economic Outlook.
The IMF
in particular plays an increasingly vital role in scrutinising and judging
governments’ economic policies. We know from the IMF’s own report into failings
before the crisis that, when he was at the Treasury, Ed Balls used to suppress
any external criticism of the enormous debts run up by his boss, Gordon Brown.
Now that we know the scale of the wreckage he left behind we can only wonder at
what might have been different if the country had been allowed to see those warnings.
Now Mr
Balls is in opposition and he says the Government should “heed the advice of
the independent IMF”. So what is its advice today? It starts by stating that
decisive action to tackle the record budget deficit that this Government
inherited is “essential” and that “substantial progress” has been made. When
asked this morning what might have happened if this Government had not acted to
deal decisively with the deficit, Mme Lagarde’s answer was stark: “I shiver.” I
couldn’t agree more.
Of
course, economic growth has been lower than forecast. The IMF gives three
reasons for this: commodity price shocks around the world, especially the big
increase in the oil price; heightened uncertainty because of the euro crisis;
and the fact that unwinding the huge imbalances built up in Britain over many
years is “likely to be more protracted than previously anticipated”.
I know
that of all these developments, the one that people have noticed most in their
daily lives is higher prices. That’s why this morning’s news that inflation has
fallen is especially welcome. Things are still tough, but at least we are
heading in the right direction.
As well
as lower inflation, the IMF notes recent falls in unemployment as a positive
sign. Indeed, it notes that there have been “fewer employment losses than in
the aftermath of previous major UK recessions”. Unemployment remains too high,
but our efforts to help people find jobs are paying off. The Youth Contract
that we launched last month will help more young people into work.
What
about the challenge of dealing with our debts? Does the IMF back the
Government’s responsible deficit reduction plan or does it back Labour’s calls
for more borrowing and more spending? The answer is clear: deal with your
debts. It thinks the current pace of deficit reduction is “appropriate” and
that the first line of defence against slower economic growth is further action
on monetary policy and credit, not yet more government borrowing.
Indeed,
the IMF today specifically welcomes the Prime Minister’s announcement that we
will go further than we have already to make sure that the low interest rates
we’ve earned as a nation are passed on to businesses and families. In the
coming months we will be announcing new policies to get credit flowing to small
businesses, boost the construction sector with more support for housing, and
attract more investment into vital infrastructure projects.
What
about the report from the OECD? It takes a similar view: “the ambitious
Government plan to restore fiscal sustainability remains on track and
appropriate”. It also judges that meeting our deficit targets has earned
credibility “as evidenced by the very low interest rates on long-term
government debt”.
The
British Government has had to take many difficult decisions, but the report
card we’ve got from those who take a careful, independent view of the economy
is a good one.
We can
put our own house in order, but we need the eurozone to do the same. The IMF
says that setbacks in the euro area are the “key risk to economic prospects and
financial stability in the UK”. We’ve set out what needs to be done: more
support for indebted eurozone economies from the European Central Bank and the
stronger economies in the zone; moves towards a system of fiscal burden sharing
such as Eurobonds; and more economic reform to improve competitiveness. Whether
our neighbours take the necessary action remains to be seen. We seek the best
outcome but at the same time we are preparing for something worse. Contingency
plans are well developed.
It’s precisely
because we’ve taken the tough decisions at home that we’re ready to face the
problems from abroad. No one says it will be easy, but we will do whatever it
takes to keep Britain safe in the financial storm.
George Osborne- 22nd May
