It may not be much, but by the dismal standards of the last five years, the UK economy finally shows signs of revival. Growth is picking up, house prices are buoyant, the deficit has stopped rising and at least one bank may soon return to private hands. It's hardly a boom but it's not a full-blow depression either. Just about everyone feels pleased about that.
Except for one man. The shadow chancellor, Ed Balls, staked his reputation on the argument that government spending cuts would lead to a fresh recession. He has been proved decisively wrong. The only issue now is whether Labour leader Ed Miliband will let an increasingly discredited shadow chancellor ruin whatever slim chance he has of winning an election that is now less than two years away or whether he will get rid of him.
British economic growth accelerated to 0.6% in the second quarter of the year, from 0.3% in the first. We're hardly out of the woods GDP still has not recovered its 2008 peak but after fearing a triple-dip recession for much of last year, that's certainly an improvement. Retail sales rose by 0.2% in June not spectacular, but better than the declines recorded for much of 2012. House prices are rising again, not just in London, but across much of England as well. Sure, they are being artificially boosted by a supportive central bank and the government's Help to Buy' subsidy scheme. But there's nothing like rising property values to get the British feeling more confident.
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And employment is surprisingly healthy. The latest figures showed unemployment fell by 57,000 to just over 2.5 million. The total number of people with jobs is now above 29 million, close to an all-time record. That may well be because real (after-inflation) wages have been cut significantly, mainly in the private sector. But it is better for people to have jobs than not to have them.
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None of this follows the script that the shadow chancellor had mapped out. Balls has spent the last three years warning that government spending cuts would inevitably lead us deeper into recession and even a full-scale depression.
"Austerity is not working in Britain," he argued in October 2011. "This can't go on." The tune hadn't changed at all the following year. "Over the last two years David Cameron and George Osborne have turned Britain's recovery into a flat-lining economy and now a deep and deepening recession," Balls argued in July 2012. Earlier this year, he stuck rigidly to the same familiar groove. "A plan B' now should include a compulsory jobs guarantee for the long-term unemployed and a temporary VAT cut to boost family incomes and our struggling high streets," he said in January this year. True, Balls has modified his message in the last few weeks, accepting some cuts, and putting less emphasis on more spending. But it is almost certainly too little, too late.
It isn't hard to work out what his game plan was. Balls evidently figured that by now the UK would be into a quadruple- or even quintuple-dip recession. The jobless would be lining the streets, and the pound would be in freefall. He would be vindicated as the man who predicted the catastrophe and could ride triumphantly into Number 11 Downing Street as the man to sort out the mess. Plan B, involving more borrowing, and higher spending, would rescue us.
Perhaps because he once worked for the Financial Times, Balls has a reputation as an astute economist. There is not much evidence for it. He can reel off lots of jargon when he has to. But when he was advising Gordon Brown, it never seems to have occurred to him that the government might not have actually abolished boom'n'bust' and that it might be sensible to prepare for a downturn that was always inevitable. And he seems to have genuinely believed austerity would turn Britain into another Greece with year after year of steep falls in output.
In Balls's world, the main motor of economic activity is government spending: when that falls, the economy collapses. He never seems to have noticed that government spending is, in fact, a drag on the economy, and when you cut it, the private sector usually gets stronger, not weaker. Of course, it must be accompanied by a flexible exchange rate, and a central bank that will drive interest rates lower if necessary but so long as those conditions are in place, it is perfectly normal for economies to grow when the state is trimming spending.
Now Balls looks more and more exposed. Not only was he the architect of the failed policies of the last government, for which much of the public has yet to forgive him, but he has warned repeatedly of the dangers of austerity, in spite of his recent lukewarm change of heart. Are people really going to trust his judgement when he has been proved so wrong? Almost certainly not.
The reality is that with the government hell-bent on propping up the property market, if nothing else the recovery is likely to strengthen from here, for at least two years. Against that backdrop, Balls's warnings of disaster will look more and more wrong-headed. The only issue is whether Miliband has the guts to sack him or lets Balls lose Labour the 2015 election.
