Wednesday, July 27, 2011

No time to go wobbly

0.2% growth in Q2 is, while in line with predictions, really nothing terribly special. The chaps at FT Alphaville call it a ‘pass grade’ and I suspect that’s fair enough. The economy is, and will remain, the key political battleground of this Parliament. So far, indeed, the only really defining theme of the Coalition is its attempts to reduce the deficit. A word here on deficits. I have given up on being surprised at how few people really seem to understand the difference between debt and deficit. The always estimable Fleet Street Fox puts her finger perfectly on it here:

THE best analogy I've heard for our economy is that the national debt is like a bath filled with water, and the deficit is like leaving the taps on.

Quite. Debt is a stock, the deficit is a flow. But then, alas:

The spending cuts the Coalition has made - the warships scrapped, the coppers sacked, the day care centres closed - amount to trying to empty that bath with an egg cup.

Would that they did. We’re not even nearly at the point of emptying the bath. All the cuts (and in all truth, the cuts already implemented are very small potatoes indeed) are designed to try and shut off the faucets. We’re still running a substantial deficit – and are forecast to be doing so right the way through this Parliament.

What would kill this Government is if the cost of all this borrowing were to rise substantially – as it did in Greece and just has done in Italy. The Government’s fiscal policy can be interpreted more or less entirely as an attempt to demonstrate to the world that, although the UK finances are in a pretty ordinary state, there is at least a clear and credible plan to remedy matters, and the Government are strong enough and determined enough to see it through. In the medium term at least, nothing matters more than this. And how are they doing on this front?

The UK hasn’t been totally repriced over the past 15 months because the deficit has collapsed, it has been repriced because of the evident and absolute political commitment to get the deficit down which when compared with peers in the likes of US or France leaves the UK as a very obvious relative safe-haven. Is that political commitment diminishing? We think not.

Ed Balls is the equivalent of a Cornish wrecker holding a false light off Land’s End – reversing UK fiscal policy and increasing public spending would send catastrophic signals about the long-term viability of UK debt – signals that would act as a self-fulfilling prophecy as the cost of borrowing increased. This is no time to go wobbly George.


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