The release of the latest growth figures tomorrow will determine whether it is Ed Balls or George Osborne who takes an early lead in the defining grudge match of this parliament.
If, as expected, growth falls from 0.7 per cent in the third quarter to between just 0.2 per cent and 0.5 per cent, Balls’s argument that early spending cuts choke off recovery, lead to higher unemployment and slow the pace of deficit reduction will begin to resonate with the public.
Osborne may have hubristically declared that the “plan is working” but, owing to the time lag in fiscal policy, much of the growth we’ve seen so far has been due to the last Labour government’s stimulus package and the Bank of England’s ultra-loose monetary policy.
As the Times’s Anatole Kaletsky, responding to impressive Q2 growth of 1.1 per cent, wrote in October (£):
The trouble is that monetary and fiscal policies take a long time to work their way through the economy – typically, one to two years. Yesterday’s robust growth figures reflect last year’s decisions by the Bank and the previous government. They tell us nothing, and indeed may mislead us, about how the new government’s fiscal measures will interact with the Bank’s monetary policies in the years ahead.
Balls can point to the fact that the deficit for 2009-2010 came in at £156.3bn (£21.7bn lower than the original Treasury forecast) as evidence that Labour’s policy of “going for growth” was beginning to fill the hole in the public finances. The Tories may hope to use Balls’s past predictions of a double-dip recession against him, but “things could be even worse” isn’t much of an argument.
With inflation at 3.7 per cent, we can expect the spectre of stagflation to re-emerge if growth is as low as 0.4 per cent. Balls, a Harvard-trained economist, will be able to exploit this development in a way Alan Johnson simply could not. With unemployment also rising, Osborne will need a better riposte than “there is no alternative”.
There should be plenty for Keynes’s Rottweiler to get his teeth into tomorrow.