Chancellor Needs Hard Hat For Fight Ahead

It's a rum state of affairs when Britain is apparently punished for having a strong economy.

After all, we've spent the past five or six years telling ourselves that all we desperately need is a bit of growth.

And yet that's how things look today, with the UK fighting off an attempt by the European Union to charge it an extra €2.1bn (£1.7bn) because of the strength of its recovery.

As if to rub it in, that coincides with another set of relatively strong gross domestic product numbers, reminding us that the recovery is indeed in full train.

Now (NYSE: DNOW - news) , in truth the EU charge is largely down to long term rather than short term trends - particularly revisions to long-term output levels conducted over the course of the past year or so.

But it nonetheless begs a few questions: first, where will this money come from? Second, is the UK economy really in a position of strength?

The first question is rather awkward for the Chancellor, for while the economy is certainly growing a lot quicker than expected ( today's 0.7% growth means GDP is 3% higher than a year ago, and 3.4% higher than before the recession hit in 2008), it isn't bringing in as much tax as had been hoped.

Indeed, while economists had expected the Treasury to reduce the deficit by £10bn, the latest numbers suggest it may end up the same or higher than last year.

Indeed, the OBR had been expecting income tax receipts to rise by 6.5% this year; instead they have fallen by 0.8%.

And when you factor in the extra money the Chancellor will need to pay for the new tax cuts he set out at party conference a few weeks ago, one has to conclude that there simply isn't much cash to spare.

The second question is simpler to answer. The UK economy is doing well at the moment.

Today's growth numbers were more or less in line with expectations, and every sector of the economy - services, production, agriculture and construction - grew at a fair whack in the most recent quarter.

Though don't be fooled by the optics frequently employed by the Chancellor.

You might have assumed, given how many times you've seen George Osborne in a hard hat or (as he was today) in a car factory, that these were the sectors which really drove the recovery.

The detailed figures we got today tell a different story. Since the start of the crisis output in the construction sector is actually down by 8.2%. The output of the motor vehicle sector is, admittedly, up by 4.4% but it has driven growth far, far less than administrative and support activities, up by a whopping 27.8%.

In other words, it is office workers who have driven the recovery, not people in hard hats.

It is the support staff, computer repair engineers and other white collar workers whose sectors have expanded most quickly.

But, to bring things back to the EU once again, the problem is that those office-based sectors don't make and export things overseas.

The one aspect of the economy Britain desperately needs to improve is its balance of trade, which is woefully weak - and, if anything, worsening.

Without an improvement in that, strong GDP or not, Britain's economy will remain imbalanced and potentially vulnerable to future crises.