- Supporters of fiscal expansion "have lost the argument"
- Carney's forward guidance is working
- Rising Gilt yields are response to recovery
UK Chancellor George Osborne has declared victory over his critics and rejected claims that he is stoking a new consumer and housing bubble ahead of the 2015 election.
Osborne said politicians and economists who had called for him to rein in government spending cuts had been proved wrong by Britain's economic recovery.
"Those in favour of Plan B have lost the argument," he said in a wide-ranging speech.
Osborne also backed the Bank of England's forward guidance on monetary policy and said it was working. He said there was no housing bubble developing and that the economy was growing in a balanced manner.
The economy had struggled early in his tenure not because of necessary spending cuts but because of external pressures such as rising commodity prices and the crisis in the Eurozone, he said.
What set the UK apart was a clear plan set out early on, which allowed interest rates to stay low for the Bank of England (BoE) to support the economy, he argued.
"The government's continued fiscal credibility has allowed the UK authorities to pursue a strategy of monetary activism with schemes such as Funding for Lending that have supported a dramatic improvement in financial conditions."
Changing course to boost government spending would be "disastrous" and set the UK back, he said.
Economists at Capital Economics said: "The good news on the economy has gone on for so long that even the Chancellor now feels confident
enough to stick his neck out and call a turning-point. This seems fair - we have now had about five months of consistently positive data."
But they questioned Osborne's claim that the economy's recovery vindicated his austerity measures.
"Even though the economic weakness has not been primarily due to the fiscal squeeze, the Chancellor did not necessarily do the right thing by sticking doggedly to his plans. Given the uncertainty about how the bond markets would have reacted to any Plan B, we will simply never know whether the economy would be in a better situation now or not."
Osborne dismissed claims that he was engineering a new boom in the housing market by helping buyers raise a deposit.
"This debate would benefit from a little less assertion and a little more examination of the evidence," he said. A sharp drop in higher loan-to-value mortgages is a market failure and not a good thing, Osborne argued.
Help to Buy will increase supply as well as demand so there will be no bubble, and it is time limited to stop the market getting out of hand, he said.
Osborne also rejected criticisms of the BoE's forward guidance on monetary policy under Governor Mark Carney.
Markets have priced in interest rate increases far earlier than the BoE and Gilt yields have risen sharply. But Osborne said they would have risen further in response to the recovering economy if the BoE's Monetary Policy Committee (MPC) had not pledged to keep rates low.
Osborne echoed Carney's views by saying raising rates too early would be bad for the economy. But the BoE also has new powers to step into the markets if the economy is overheating, he added.
"Just as inadvertent and early tightening of monetary policy would be a mistake, so would leaving it too late to take away the punchbowl further down the track."
Osborne rejected arguments that the UK had "the wrong sort of growth", focused on domestic consumer spending.
Manufacturing, services and construction are all growing, net exports and investment are picking up. The best way to boost living standards, which have been eroded by inflation, was to keep interest rates, low, he added.
Osborne said many more billions of cuts are still needed after the next election.
"We will learn the lessons of the last decade so that we are not tempted by the quick fixes that lie behind so many of our problems," the Chancellor said.