The front page of the FT decided to lead on an apparent volte face on the part of David Cameron. “First Cameron Budget would focus on growth”. I would like immodestly to remind readers of Slash and Grow:
It may seem odd to urge a future government to care about economic growth . . . If the next British government proceeds upon the basis of deficit reduction before growth, it risks achieving neither.
Yes, clearly that did it. Oh, it might have been this poll instead. Laura Kuenssberg had implied that they were getting polling data suggesting the Slash Hard Often and Deep strategy was not selling as well. Do they really change their minds that quickly? Have they become more bullish, like the Bank in its recent projections? And (third question in a row), if the Tories are now more bullish, does this mean (a) they think they don’t need to cut as much, because growth will deal with the deficit or (b) they have to cut faster, because, as Buttonwood points out, growth means that companies will start wanting your money instead. **
Reading smaller print, it is not so easy to detect a Conservative change in course. What he says is that the first Budget should be about ‘getting the deficit under control’. He then says ‘it should also be a Budget that goes for growth’. Yes, and icecream, and world peace. But faced with a choice , what will it be? That is a rhetorical question, because politicians never face hard hypothetical choices. If you said to a politician “If you had to throw either your mother or wife out of a burning hot air balloon which would it be?”, and they said “The mother”, then the headline would be “Politician wants to throw his own mother to her death”. So it is with fiscal choices.
There is an interesting (to me) difference between fiscal and monetary policy. It is that fiscal policy benefits from being planned, whereas monetary policy can undermine its own intentions that way. If the Bank announced that it would stick rates up to 5% in 3 years’ time, and we believed them, then current money demand would rocket/investment would crater. The long-term interest rate curve would wiggle like a snake dropped into hot oil. Whereas being told that in 2011 or 2012 the government will start hurting benefits, pension entitlements, and hospital building? Probably not the same effect. In fact, a credible fiscal tightening might lower rates.
Duncan thinks Cameron is still in “big state problem mode” and that he is obviously wrong, and believes in some daft 1930s logic called “Loanable Funds”. But the IMF’s Global Stability Report had similar logic about demand and supply of credit. It may not apply this year: it may next (see also Ben at the Indie).
On another subject, Conservatives already are in power in townhalls everywhere. Which is why this headline is also worrying:
Do you know one thing we definitely need? New homes. Ask Tim.
What if there is a hung parliament? asks Rick . A popular Tory view is that a hung parliament spells death to our credit rating. His verdict is fairly hawkish:
If the Tories were the largest party, but didn’t have a majority, they should proceed as if they did. Draw up a 5 year plan to cut the deficit, with tax rises and spending cuts, phased in. Then put it before the House and defy the others to vote it down, given that it would be very clear to all involved what the market reaction would be to a failure to confront the issue.
But Hamish McRae goes too far in trying to imagine a world in which the idea of the government setting fiscal targets is as anachronistic as their setting interest rates. There are irreducible intergenerational, political social choices about investment, public versus private goods, current versus future generations, and so on. When monetary policy is normal, it ought to be person-blind*. Fiscal policy is never person-blind. Politics, not technocrats. See Fiscal Rules.
I think one reason we are not as desperate about the end of fiscal stimulus in this country is that our unemployment has surprised on the good side. Even Alan Blinder talks of the Fed ‘failing in its mission’. Whereas Charles Goodhart says “mission accomplished“.
In a typically excellent post, Brad DeLong argues that the size of Goldman’s bonuses are not much compared to the upside of further fiscal stimulus. So why does the former stop us doing the latter? However, I would point out that the size of the various investment bank bonus pools is NOT insignificant in comparison to the capital shortfall of banking. If bonuses in this country were all invested in core banking equity, they would be much better placed to lend to the normal businesses that need it.
UPDATE: what a sorry, waffly long post. I’m sorry. And I never mentioned Catherine Ashton. Damn
*of course, right now you could make a case for the monetary stance to be suiting the asset-rich above all, but that is another argument.
**OK, not the whole market, but I have a feeling for what will change my mind about investing elsewhere.