Plan B and a Hard Place: Osborne Stuck in Middle

George Osborne, the UK Chancellor of the Exchequer and the man behind the UK’s austerity program has been very clear.

There will be no plan B on austerity, and bringing the UK economy’s runaway spending under control is not up for negotiation.

Three times in the last 6 months Osborne has gone on record during interviews with CNBC to say this chancellor is not for turning.

Yields on 10-year UK debt are trading at a very small spread against both the bund and 10-year Treasury, indicating the bond vigilantes have other fish to fry and keeping costs for Britain’s mortgage ownerslow.

That is to be welcomed given data from the UK has been weakening in recent months as Osborne’s austerity measures begin to be felt across the UK public sector and the north of Britain in particular.

With the data deteriorating, Osborne is not short of people offering advice.
52 economists said last week that Osborne needs a plan B on austerity.

The OECD’s chief economist said he saw merit in slowing the pace of fiscal consolidation if there was no good news on the economy.

The International Monetary Fund and European Union disagree and have pushed Osborne to stay the course on austerity in a message that will be very welcome at Number 11 Downing Street.

A Rock and a Hard Place

With little appetite for a change of course on Plan A, the team at the UK Treasury will be hoping for some luck on the economy over the next few months.

But even if their luck dries up one economist believes there is room for manoeuver within Plan A.

“For now, the Government is giving every indication of sticking firmly to its plans. And we still think that it is right to do so,” said Vicky Redwood, the senior UK economist at Capital Economics in a research note.

“The public finances have so far performed broadly as anticipated, while Plan A has a bit more flexibility than is commonly perceived, for example by letting the automatic stabilizers to work if the economy weakens,” said Redwood.

With many claiming Osborne is an ideological masochist, cutting for the sake of cutting and unable to feel the pain of the people given his family wealth and private school education, Redwood said the conservative-led coalition government will act like all governments and focus on re-election.

“We doubt that the Conservatives would let their preference for small government jeopardize their electoral prospects.

The reality is that the Chancellor is stuck between the proverbial rock and hard place,” he said.

“But abandoning the fiscal consolidation would not guarantee that growth prospects would be any better. Markets could take fright, prompting bond yields to shoot up. It is easy to forget how fearful people were before last year’s general election that the UK might be going the way of Greece,” said Redwood.

With the IMF offering a few ideas on what to do if things get worse for the UK economy, George Osborne could be able to offer a few changes in policy that would look more like full steam ahead with Plan A rather than a Plan B.

Temporary tax cuts aimed at boosting business investment, job creation and supporting low income households were offered up as possibilities by the IMF if accompanied by the “adoption of deeper long-run entitlement reform to safeguard fiscal sustainability and market confidence”.

The second option the UK could work with is another round of quantitative easing by the Bank of England.

If things do get worse for the UK it would be more likely Osborne would attempt to push on with Plan A with some red meat for its small government supporters and some help from the Bank of England than a U-turn on Plan B.