UK's Osborne Still the Darling of the Bond Market?

Since taking power in 2010, the key achievement of George Osborne, the UK chancellor, has been convincing the bond vigilantes that Britain’s debt burden is manageable. The prize for Osborne and the UK public has been very low borrowing costs.

Big Ben
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Big Ben

Osborne has done such a good job convincing the market of Britain’s fiscal solvency that the boss of the world’s biggest bond fund says Osborne has the scope to pump some money into the economy.

"The economy in the UK is worse off than it was when the plan was developed, so there should be at a minimum fine-tuning and perhaps re-routing of the plan,” said Bill Gross, the manager of PIMCO, in an interview with the Times Newspaper on Monday.

"The UK is actually in the best position of all to make a mid-course correction," he added.

Gross’ comments will be welcomed by the Chancellor and the UK government but play into the UK national debate on austerity in a way that will also be welcomed by Osborne’s political opponents.

On the one hand Gross makes it clear that Britain has some wiggle roomdue to its decision to take the knife to government spending following the austerity measures put in place since the election in May of last year.

The problem is that the manager of the world’s largest bond fund is telling the UK that it would be OK to work on a plan B, something Osborne has consistently ruled out as the Labour opposition has called for a number of cuts to be delayed to help shore up economic growth.

The UK opposition is edging ahead in the polls as austerity measures hit the public sector and economic growth falters, but at the weekend even a prominent figure of the Labour party spoke in favor of austerity.

Ex-Chancellor Attacks

Alistair Darling, the former UK chancellor, kicked off his book tour by telling the BBC that his relationship with Gordon Brown when Brown was Prime Minister was "dysfunctional" and said the last Labour government was in "chaos" amid infighting over how to respond to the financial crisis.

Darling added that Brown’s refusal to allow Darling to outline possible spending cuts played straight into his enemies' hands.

Highlighting just how divided the last government was helped the current government hold on to its relative unity and hit out at the current opposition.

“Alistair Darling has now admitted that Labour did not have a credible economic policy last year because they refused to say what spending they would cut,” the Conservative Deputy Party Chairman, Michael Fallon, said.

“Yet Gordon Brown’s protege Ed Balls [current shadow Chancellor] is still in denial by sticking to the same course of spending and borrowing more,” Fallon added.

So Osborne can take the political high ground at a time when the opposition had hoped it was finally beginning to profit from government cuts and its handling of the recent riots in the UK.

Instead, they are dealing with further embarrassment from their former leadership and being told that current government policy has been so successful that there is now wiggle room on austerity by Bill Gross.

The risk for Osborne remains the same, the economy. The British Chamber of Commerce cuts its growth forecasts late last week saying unemployment is rising, inflation remains high and growth is slowing.

As Greece has shown, austerity can actually add to your fiscal woes if growth is impacted. Tax revenues fall and no matter how much you cut it can become very difficult to meet fiscal targets.

Unlike Greece, the UK does not have the IMF and bond market breathing down its neck. Getting ahead of the bond market looks like a very good call by Osborne and if the bond market begins asking for a little more growth than austerity, the UK chancellor can turn around and say "we don’t want to end up like Greece," a message he used to sell austerity in the first place.