Growth's back and Britain is on the mend... By Alex Brummer and Simon Heffer Phd In his Commons address, Osborne hinted at the underlying strength of the economy George Osborne's determination to stick to his guns, with yet another £11.5 billion of budget savings to be delivered in an election year, might seem foolhardy in the extreme. But the Chancellor has to retain the confidence of the financial markets by showing he is willing to tackle the legacy of deficit and debt left by Labour. If the markets no longer have confidence in the economy, Britain's low interest rates, which are so vital to recovery and growth, will come to an abrupt end. And once that happens, we face financial disaster. Some of the first fruits of Osborne's course of action will be seen today when the Office for National Statistics presents its revisions of gross domestic product (GDP), the key measure of the total output of the economy. The new data will demolish one of the great canards of our time - that the British economy was in "double dip," with a second recession at the start of 2012, and in danger of going into a "triple dip," with a third recession at the start of this year. The truth is that the economy, after a dreadful couple of years, is genuinely on the mend. In the first three months of this year it recovered healthily, despite some appalling weather which usually slows down performance, and that trend is confirmed by all the major indicators and surveys. The influential National Institute of Economic and Social Research, an often stringent but fair critic of the government, says that output expanded by 0.6 per cent in the last three full calendar months. This means that the "modest recovery" talked of by the retiring Bank of England Governor Mervyn King is well and truly underway. George Osborne told MPs that the British economy was out of intensive care and on the road to recovery Earlier estimates of GDP invariably underplayed the actual health of the economy. In particular, early estimates of construction activity - on buildings which range from shopping centres in Leeds, to office towers in the City of London and new homes across the land - fell short of the true picture. But now, the building industry looks to be doing much better than was previously thought. It is this improvement - together with a formidably robust service sector, sharply better production from the North Sea, and higher export levels - that is turning the economy round. One leading City economist, Simon Ward of fund managers Henderson, points out that there has been a strong pick-up in the amount of money circulating in the economy. He suggests that, on current trends, the UK could be among the fastest-growing leading Western nations this year, expanding by a remarkable 2 per cent. The 'modest recovery' talked of by the retiring Bank of England Governor Mervyn King is well and truly underway In his Commons address, Osborne hinted at the underlying strength of the economy. Looking at the Labour benches, he pointed out that for every one public sector job that has been lost as a result of austerity measures, another five have been created in the private sector. In absolute terms some 470,000 new jobs have been added in the past year and the number of people in employment is the highest in the nation's history. Essential to the delivery of continuing growth, however, will be the discovery of new markets for Britain's goods and services - not least because of the appalling health of the economies of our major trading partners in the European Union. Mark Carney will chair his first meeting of the interest-rate-setting Monetary Policy Committee next Wednesday The Chancellor said that one of the keys to this will be a "strengthening of trade and investment links with China." As a spending priority, the Government is planning to work with Britain's exporters to set up a series of centres to promote British goods and services in China's fastest-growing cities. Clearly, switching focus from Europe to the new wealth-creating economies of Asia is going to be critical to our continuing recovery. However, in the meantime, it is Britain's close trading and financial relationship with the United States and its recovering economy that is proving most important to export-led growth - with exports of both goods and services to the U.S. climbing strongly in recent months. It is often forgotten, amid the intense interest in what is going on in Brussels and the eurozone, that America is far and above our most important single marketplace, buying everything from Rolls-Royce engines to defence equipment as well as music made by Adele and other iconic figures in our pop industry. We should not, however, get too carried away by the good news. No one should underestimate the task of building the economy up again to the peak it reached before the 2008 financial crisis. Britain's debt is continuing to climb despite the cuts and it will not reach its height until 2016, when it will be the equivalent of an alarming 93.2 per cent of the nation's output according to the latest IMF forecast. If items such as public sector pension liabilities, which are hidden from the country's balance sheet, are included, our debts will actually exceed national output that year. In fact, the Chancellor's latest reductions in spending represent less than 0.1 per cent of the national debt as projected in the year 2015-16. Trimming the national budget as the Chancellor did yesterday is no more than a holding operation designed to stabilise market confidence between now and the election. That is why the arrival next Monday of the new Bank of England Governor Mark Carney, poached from the Bank of Canada, is regarded as so important on Downing Street. The cuts announced today will have to be implemented by whoever wins the 2015 general election Carney will chair his first meeting of the interest-rate-setting Monetary Policy Committee next Wednesday and Thursday and seek to set in place the new mandate for the Bank of England outlined in the budget. It will be his job not just to keep inflation close to the Government's 2 per cent target but also to support growth. Now that the housing market finally appears to be recovering from the shock of the financial crisis, and more small and medium-sized businesses are taking out bank loans to expand, any increase in interest rates by Carney would be the last thing that Osborne wants. Mervyn King warned this week of the dangers this would pose in terms of homeowners struggling to pay mortgages and the loss of confidence in business circles. The financial markets, it should be remembered, are still extremely jittery. The mere suggestion last week that the United States might curb its huge amounts of quantitative easing - or printing money - sent shares crashing across the globe. Carney will want to prevent that happening at all costs, as will the Chancellor. State spending reductions, while necessary to calm the markets, can make only a small dent in Britain's deficit and debt. It is higher-than-expected growth that could radically alter the picture. The greater the output of the economy, the more taxes are paid - and the less money is paid out in welfare benefits because so many more people are employed. If the Chancellor can deliver sustained growth by the election, he could then be more radical, using a second term to take a long-overdue axe to Britain's mammoth social security bill - and put the economy on a path to true prosperity. Mr Osborne is a politician first and a Chancellor second. He wants more than anything to reach the next election without damaging the Tories" prospects. Thus his package was designed not to leave voters worried about their families" economic prospects. But I fear this latest exercise in addressing the nightmare that is Britain's ever-worsening debt was marginal at best, irrelevant at worst, and that the Chancellor will be forced to take much more serious measures in due course. In truth, all Mr Osborne set out yesterday is a holding position until after the election. This was not a new, radical, long-term strategy of the type that is desperately needed to kick this country out of its addiction to living far beyond its means. The Chancellor posted this photo on Twitter last night as he put the finishing touches to his statement revealing where the axe will fall Of course, Labour's legacy of a mammoth debt mountain means that it must take the lion's share of the blame for the terrible mess we are in. But the Coalition is also at fault for its refusal to significantly scale down the size of the State and to give more support to the private sector. The tragedy is that the fragile economic recovery is also being hampered by ministers" failure to have acted sooner with more decisive cuts both to spending and taxes. For the truth is that Mr Osborne is paying the price for having been over-optimistic when he became Chancellor in 2010 and is now being forced to quickly make amends. This mistake is now being compounded by a woeful absence of clear thinking at the Treasury as to how we can achieve sustained economic growth. The NHS is near breaking point. Health care could be delivered more cheaply, but governments are terrified of challenging a culture in which success is measured by the amount spent rather than by the outcomes achieved Britain's banks remain a major part of the problem - refusing to lend to any businesses that present an above-average degree of risk as they over-compensate for their recklessness before 2008. Meanwhile, the EU (a key export market) is contracting, and the worst economic problems there - from Greece to France, Italy and Spain - are, if anything, worsening. For a country like ours that seeks export-led growth, and where productivity remains poor, this is deeply alarming. I fear that Mr Osborne and his colleagues lack the resolve for a serious debate on these huge issues, preferring to live in a world rooted in economic fantasy In addition, Asian and emerging markets, while stronger than Europe, are also slowing down and will therefore be buying fewer of our goods. But even these difficulties pale into insignificance against the threat of a rise in interest rates. As Sir Mervyn King, outgoing Governor of the Bank of England, indicated this week, a generation that has taken out huge and cheap mortgages faces a torrid, and possibly ruinous, time when - and it is when, rather than if - base rates rise. It goes without saying that any interest rate rise will also have calamitous effects on businesses. Their lending costs will rocket, as will the price of their goods in the export markets. This will create a toxic mix when inflation inevitably rears its ugly head - a near inevitable result of the £325 billion of extra money printed in the form of quantitative easing. In turn, the Bank of England will be able to tame higher inflation only by trying to choke off demand by raising interest rates again. It is against this background that a new Bank of England governor, Mark Carney, is about to take up his post. He has hinted that to get the economy moving he wants more quantitative easing. But I fear that this will be like feeding an addict more heroin in an attempt to effect a cure. For his part, Mr Osborne, as a Tory, might privately want to cut taxes in order to try to boost the economy, but is constrained by the socialists in the Lib Dem part of the Coalition - notably Vince Cable. Robbed of this powerful tool, he is forced to accept slower growth than is necessary. The fact is this: the overall level of Britain's spending - forecast to be £745 billion by 2015-16, which represents a £39 billion rise on 2012-13 - is still far too high. Another cause for pessimism is that the Government will not address the essential institutional reforms that might bring state spending down considerably. The EU (a key export market) is contracting, and the worst economic problems there - from Greece to France, Italy and Spain - are, if anything, worsening For example, the NHS - which is at breaking-point - will soon be incapable of giving a good service to anyone. If the Government doesn't end the pretence of its viability, restructure its priorities to cope with the rapidly ageing population and the seriously ill, and slim down its bureaucracy, it will implode. Health care could be delivered more cheaply, but governments are terrified of challenging a culture in which success is measured by the amount spent rather than by the outcomes achieved. Similarly, ring-fencing education spending is absurd - the Germans spend less than us on schools yet get better results. Yes, the Chancellor announced some measures to clip the nation's huge welfare bill, but there is little appetite among politicians for a radical review of spending, beyond measures to cap benefits. The Chancellor and Chief Secretary to the Treasury Danny Alexander emerge from the Treasury with the details of the cuts. Mr Osborne is paying the price for having been over-optimistic when he became Chancellor in 2010 The truth is that if Britain is to remain solvent, the retirement age will have to rise again, more of the pensions burden may have to move on to the private sector, and unemployment benefit may need to be restricted to those who have contributed financially to the system. I fear that Mr Osborne and his colleagues lack the resolve for a serious debate on these huge issues, preferring to live in a world rooted in economic fantasy. As noted, I also fear that, in the absence of export-led growth, he will encourage the Bank of England to print more money. Our total debt is now £1.2 trillion and rising by about £17,000 a second. There are two ways to make that figure less awesome. The first is to pay a lot of it back - which we lack the political will to do. This would entail a dramatic reduction in what the State does, and in the size of the public payroll. The second is to create such high inflation that £1.2 trillion becomes much smaller in real terms. Anyone who lived through the ravages of inflation in the Seventies, when savings were destroyed, the currency debauched and the country demoralised, should not want to see a repeat of that ignominy. Yesterday's review, like all the others George Osborne has had, was like taking an aspirin to tackle an aggressive cancer. Soon the only option will be revolutionary - with potentially catastrophic consequences that will change our way of life and end, for a significant period, any assumptions of prosperity.