This year hasn’t been a very good one for U.K. Chancellor George Osborne.
With the British economy back in recession and contracting at the same pace as Spain’s in the second quarter, confidence in Osborne’s stewardship of it has plummeted. A poll for ITV news late on Tuesday found only 16 percent of voters trusted Osborne to run the economy, while 62 percent said they did not trust him.
The poll followed data which showed U.K. government borrowing had risen in July as tax receipts from business fell and spending on unemployment benefits rose. For Osborne the data was a blow, given he has refused to even discuss changing course on austerity, or Plan A as it has become known.
The pressure on the Chancellor to change the government’s current policies is immense. His predecessor Alistair Darling used an interview over the weekend to call on Osborne to change plans to cut government spending, accusing him of causing “immeasurable damage” to the U.K. economy.
You would expect that from the man who lost his job to Osborne at the last election but the business community, historically very supportive of Osborne’s Conservative Party, are also calling for change. Overnight a poll from the Institute of Directors (IoD), a business lobby, showed that 44 percent of top business executives had deferred an investment decision due to economic uncertainty.
Urging Osborne to take bold steps to boost confidence the IoD’s chief economist, Graeme Leech warned that things could get worse. "Low confidence leads to delayed decisions, and delayed decisions further undermine economic confidence - it's a vicious cycle,” said Leech.
Having refused to even consider a Plan B that would involve raising government spending in order to underpin growth, a report in the UK’s Daily Mailthis morning indicates Osborne is planning to come out fighting in September with a Plan C involving investment in roads and housing and “nuclear” spending cuts.
If true we will have to wait and see if Osborne can sell such a plan to his coalition partners the Liberal Democrats. One thing is for sure though; Osborne’s fiscal policy added to unconventional measures from the Bank of England have kept U.K. borrowing costs very low.
The 10 year U.K. Gilt currently yields less than a 10-year Treasury indicating investors are not overly worried about Britain’s fiscal position despite the U.K. government owing creditors over a trillion pounds, or about 41,000 pounds for every man woman and child in the United Kingdom.
With U.K. debt seen as a relative safe haven investors could also be betting on another round of money printing from the Bank of England, but the end result of such low borrowing costs are low mortgage payments for those with a good credit history.
That message has been lost on U.K. voters judging by the polls but Osborne and his political allies remember very well what soaring borrowings mean for their party. When John Major’s government in the 1990s was forced out of the European Rate Mechanism (a precursor to the single currency), millions either lost their homes or were forced to cut back all discretionary spending to meet their mortgage payments. Borrowing costs soared into double figures as the U.K. sought to protect against a run on the pound.
This ultimately led to the Conservative Party losing power to Tony Blair and the Labour Party for a generation and Osborne has said time and again he will not allow such an event to happen under his watch.
As the U.K. Chancellor works on what to do next he will have been playing close attention to an interview CNBC conducted with the head of sovereign ratings at Fitch on Tuesday. “Throwing out plan A, without a credible plan to bring down what is still a very large deficit, that is still rising in the U.K. at a very rapid rate does pose some risk,” said David Riley in an interview with Worldwide Exchange. If the Chancellor is not feeling the love now, he knows things would be a lot worse if Britain lost its triple-A rating and mortgage costs soared.