Chancellor of the Exchequer George Osborne came under renewed criticism after Britain’s recession deepened in the second quarter, prompting questions about his economic plans and whether he should remain at the Treasury.
The opposition Labour Party and economists including Stewart Robertson at Aviva Investors said Osborne should reconsider his fiscal squeeze after the economy shrank 0.7 percent, the most in more than three years. Two coalition lawmakers questioned whether the chancellor should keep his job.
“There is enough to be seriously worried about and it casts doubt on the idea of an expansionary fiscal contraction,” said Robertson, chief European economist at Aviva in London. “It would be absolutely irresponsible for the government not to take note and say we have to take our foot off the brake.”
Osborne’s 2010 austerity program -- which was extended for two years in November -- envisaged that the economy would be growing by 2.8 percent this year. Instead, it is 0.9 percent smaller than in the third quarter of 2010, just after Prime Minister David Cameron’s coalition came to power, and struggling to overcome aftershocks of the 2008 banking crisis and the euro- area debt turmoil.
“We all know the country has deep-rooted economic problems,” Osborne said. “We’re dealing with our debts at home and the debt crisis abroad.”
While Britain’s government has blamed the euro-area turmoil for pushing Britain into a double-dip recession, the first since the 1970s, a comparison with other nations indicates that may not be the only factor. According to a Bundesbank report on July 23, Germany’s economy, the euro-region’s largest, probably grew moderately in the second quarter after a 0.5 percent expansion in the first three months.
“Austerity is failing,” said Jonathan Portes, director of the National Institute for Economic and Social Research in London. “It’s clear that having a very sharp fiscal consolidation before the recovery had been firmly established was a mistake. We’ve seen a very sharp fall in public-sector investment and most of the deficit cutting has been in investment.”
The drop in U.K. gross domestic product in the second quarter was led by a 5.2 percent plunge in construction. Production and services also declined. The slump partly reflected the impact of record rainfall and an extra public holiday. Royal Bank of Scotland Group Plc estimates that excluding one-off effects, the economy is “broadly flat.”
Still, Osborne’s opponents in the Labour Party say his fiscal plans are too harsh at a time when households and banks are weighed down by debt. Taking longer to bring the budget into balance would have paid for tax and spending measures and sustained consumer confidence, they say.
“He’s got to admit he’s failed and change course,” Labour’s Treasury spokesman Ed Balls said in a Bloomberg Television interview. “You should see the risks ahead and act in a risk-averse way. This chancellor is being reckless.”
Economists say that, regardless of who was right in 2010, Osborne needs to follow the advice of the International Monetary Fund and loosen the fiscal stance later this year. While Cameron said today that the government “mustn’t scrap plans to deal with debt,” the IMF has said markets won’t turn on Britain in the same way they have done on other European countries if it changes its fiscal program.
The yield on the 10-year government bond was at 1.478 percent as of 11:44 a.m. in London, after falling to a record- low 1.407 percent earlier this week. The two-year yield declined to a record today. In Spain, 10-year borrowing costs are 7.19 percent.
“Gilt yields are at the lowest levels ever so you can’t speak of a loss of confidence,” said Michael Saunders, chief Western European economist at Citigroup Inc. in London. “The drag from household deleveraging has been greater than expected and the euro-area crisis has had an impact. The question is not to revisit whether they should have done less in 2010, but how do you adjust circumstances to what you have now.”
Pressure on Osborne has been mounting in recent days. Matthew Oakeshott, an upper-house lawmaker for Cameron’s Liberal Democrat coalition partners whom Business Secretary Vince Cable yesterday described as his friend, took a swipe at the chancellor when he told Sky News television that “we need our A team at the Treasury,” suggesting Osborne be replaced.
“I am not pushing for the job,” Cable told BBC Radio 4 today. “We are part of a team.”
The Mail on Sunday newspaper reported July 15 that Osborne could be moved from his post if the U.K.’s credit rating is cut, swapping roles with Foreign Secretary William Hague.
Nadine Dorries, a Tory lawmaker in the House of Commons who has clashed repeatedly with Cameron and Osborne over policy, called for Cameron to make the switch.
“For the sake of country and Conservative Party, most trusted politician in U.K., William Hague, needs to become Chancellor. #wonthappen,” Dorries posted on her Twitter account.
Voters have turned against Osborne. Two polls for newspapers published July 22 showed twice as many voters want him replaced than the proportion that would prefer to keep him as finance minister.
Forty-four percent of voters polled by ComRes Ltd. for the Sunday Mirror and Independent on Sunday said Osborne should go, while 20 percent said he should remain. A YouGov Plc (YOU) survey for the Sunday Times showed 48 percent in favor of Cameron removing Osborne, with 20 percent wanting to keep him.
Osborne, once regarded as a “shrewd central key person” is now seen as “as a bit of a bumbler,” said Steven Bell, a former Treasury official who is now chief economist at hedge fund GLC Ltd. in London. Still, “if you fire him what are you going to do? The fashion in recent years has been to hang on to the chancellor.”
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