Ed Balls is a liability for Labour

published 5 August 2013

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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"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.

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.