George Osborne has asked business leaders to hold their nerve and continue backing the government's austerity measures after the Bank of England gave the first signal since the financial crash of a sustained economic recovery.
The chancellor told the CBI annual dinner on Wednesday night that the business community should ignore critics of his economic policy who advocate a stimulus package to spur growth and reduce unemployment.
"Now is not the time to lose our nerve," he said. "Let's not listen to those who would take us back to square one. Let's carry on doing what is right for Britain. Let's see this through."
His speech followed a series of forecasts from Threadneedle Street showing the UK recovery strengthening and inflation falling over the next three years. Sir Mervyn King said the outlook had improved, with growth likely to reach 0.5% in the second quarter of 2013, after the 0.3% registered in the first three months.
The Bank of England also forecast that inflation in two years' time was likely to be around its 2% target – down from the 2.3% it forecast in February and a major improvement on the current 2.8% annual rise in prices.
Osborne said: "The fact is, the most recent economic news has been more encouraging. The economy is growing. Surveys are better. Confidence is returning to financial markets. This is all reflected in the Bank of England's Inflation report. As the governor says, 'There is a welcome change in the economic outlook'."
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| Labour accuses Osborne, pictured, of being in ‘total denial about the failure of his economic plan’ while the IMF says Britain needs temporary tax cuts and greater investment in infrastructure. |
But Chris Leslie, Labour's shadow treasury minister, said Osborne was in "total denial about the failure of his economic plan", adding that the recovery remained on track to be the slowest in 100 years.
"If we're to have a strong and sustained recovery, and catch up all the ground we have lost over the last three years, we need urgent action to kickstart our economy now and reforms to strengthen it for the long-term," he said.
"Even the IMF has warned the chancellor he is 'playing with fire' by sticking to the same failing policies and called for temporary tax cuts and greater infrastructure investment to boost the economy. It's time George Osborne listened before any more long-term damage is done."
The modest improvement in output over recent months comes against a backdrop of rising unemployment, the lowest wage rises on record and a report showing that the Obama administration's efforts to stimulate the US economy have brought down the government's annual deficit more quickly than the UK.
According to the Office for National Statistics unemployment rose by 15,000 to 2.52m in the three months to the end of March. Wages were 0.8% higher in March than a year ago and only 0.4% better if bonuses are taken into consideration, which is the lowest rise in incomes since records began in 2001.
The Congressional Budget Office's report was pounced on by Labour after it showed the US budget deficit falling this year to almost half the UK level of 7.6% of GDP, and projected to fall below 3% by 2015, two years ahead of Britain.
Labour has accused the coalition of increasing the UK's debt pile by £245bn more than had been expected as a result of its austerity measures. In contrast, the US deficit has declined faster than forecast after Obama's $447bn stimulus in 2011, which maintained payroll tax cuts to boost consumer spending, coupled with a multi-trillion dollar injection of funds by the federal reserve.
The chancellor is aware that several areas of the economy have yet to improve and that the annual shortfall in the government's budget remains stubbornly high at £120bn, down from £147bn in 2011. But he insisted he needed to keep a tight rein on government finances to keep the economy on course for a sustained recovery. Only the Bank of England could support the economy further with additional policies to support lending, he said.
"The most powerful weapon we have in supporting economic demand is monetary policy," he added. "So we have been monetary activists, helping keep interest rates low for families and firms, keeping credit channels open, using our balance sheet to encourage private investment, and repairing the banks.
"You cannot have an activist monetary policy if you're not fiscally responsible. So we have set out a credible deficit reduction plan that has brought the deficit down by a third while switching more money into productive capital investment and allowing the automatic stabilisers to operate."
King gave no sign that the Bank's monetary policy committee was about to add further stimulus, describing the £375bn it has injected into the economy and the funding for lending scheme to ease the supply of loans as "highly stimulatory".
"The economy is likely to see a modest and sustained recovery over the next three years," the central bank said, despite predicting that the recovery would "remain weak by historical standards".
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Article source : http://www.guardian.co.uk
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