There are two headlines that may have some of the less thoughtful Conservatives crowing with glee, and the rest of us very worried.  From the FT, “Investors take fright at ‘fiscal friction‘” confirms their view that we are closer to the bond-market stoppage, fear of which dominates their fiscal policies.  And Moody’s has put it in a more media friendly way: our AAA rating is at risk.*  This again echoes Conservative warnings of our being downgraded.

Their spokesmen are keeping a serious face, but established Tory bloggers are on high-gloat alert.

Let’s make no bones about it.  To succeed from the markets point of view, the PBR needed to walk a narrow tightrope.  As Buiter put it, “immediate fiscal tightening would exacerbate economic weakness. If the government had fiscal credibility, it should announce a believable plan for future fiscal tightening. Anticipated tightening lowers long-term interest rates and weakens the exchange rate today, and so is expansionary.” My emphasis.

That they have not announced a believable plan is because the Labour government needs to worry about FAIRNESS.  As the Guardian puts it, “who pays is paramount”.  But kidding everyone that you can do this on the narrow back of the top 10% – who, while earning £250bn, already pay £85bn, and can probably only do another £10bn – is not convincing.  The VAT rise that Brown allegedly scuppered would have bought an awful lot of credibility.  The distributional issues could have been fixed.

As we wrote in Fiscal Rules OK, the constituencies that matter are voters and markets.  For markets, the short term verdict is poor.

Duncan may have gone off too early. If he is looking for a bet, why not just buy this Gilt Future (disclosure, I used to work at IG).

For the voters, I think a sense of proportion is often lacking.  Maggie put VAT up from 8 to 15.  NIC’s are 1pc higher now, prompting all sorts of nonsense about “clobbering” middle earners. If you cast your mind back, John Major had basic rate income tax at 25, not 20, so marginal rates for middle earners are probably still as low as back then.  This nonsense about taxes on jobs is very overblown.   While it is tough, just compare to Ireland.  And the FT thinks that Ireland is not going far enough! Labour could have earned more credibility by announcing slightly more, put off until 2011.  The markets would have liked it, and the Tories robbed of room to criticise.  Instead, we are back in “Brown in fantasy land” territory.

Lex reminds us that interest rates matter.   This is an excellent quote:

And indeed an inflated sense of entitlement is a failing common to much of the public too. In the UK, interest rate cuts since the start of the crisis have delivered the average £103,000 floating rate mortgage holder an annual saving of £4,635. Against that, the government estimates the net cost of bailing out the financial system at £10bn – or £400 per household. For many Britons, the crisis has also handed them a windfall. Just like the bankers they love to loathe, few see it that way.

There is a lot of focus on losers this recession.  Not very much on the winners, of whom there are a huge number – perhaps even a majority.   After all, how many people have kept their jobs, benefit from lower house prices and mortgage payments, now pay less on fuel?   When we get growing again (a) we will all owe the government one, in the sense that the public debt saved our a*se (b) we will be able to help without going back to the stone ages.  Labour had a chance to help determine how it should happen – and I think they ducked it.**

PS one sliver of light.  The French following Brown on the one-off bonus tax.  The Communist FT like the idea.

It is obviously fairer and more effective to make such a tax international. Unless this is a gimmick by Mr Sarkozy (who caught his own finance ministry unawares), it is a welcome sign that pledges of co-operation by the Group of 20 may in fact be followed up on.

Merkel finds it “charming”.  Personally I doubt that many bankers will move because of this.

* Liberal Conspiracy have a very different interpretation on this from ReutersTim J’s comment points out how their interpretation is rather selective.  He points out Citi’s conclusion:

Citi’s conclusion: Unless we get a credible set of measures put in place quickly, which seems unlikely unless we get a Conservative Government with a clear majority at the next election, we think the UK’s AAA rating will be right up on the radar screens in a very short space of time. The lasting legacy of the current administration may well prove to be the loss of the UK’s AAA credit rating

A few dozen bps is not a disaster.  But in my view it was avoidable.  There is nothing unjust in listening to the people who hired us the money . . .

**Personally, I blame Brown and Balls, not Darling and the others


6 thoughts on “Is this the end?

  1. Giles,

    I might be right or wrong on the medium term outlook for gilts but regardless…

    Average duration of UK govt debt to maturity is now 8.8yrs against 5.3 in France, 4.9 in Germany and 4.3 in States.

    So even if gilt yield’s spike in the short/medium term, we are better insulated than many countries.

  2. I hugely agree. Which means that even if gilt yields spiked to 5% now, the average cost of the debt we will be holding in 2015 will probably only be 4.5% or so – certainly affordable. Commentators often act as if it is all on instant rollover, 1 day checking accounts.

    The flip side is that the hangover from high borrowing rates can be very long too – hence Maggie was paying so much more for debt interest than Gordon.

    But I expect NGDP growth > rate on debt for next 20 years, meaning the sustainable primary deficit is 2-3pc better than under Major.

  3. Oh can you hear the echoes from afar? “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
    Perhaps the PBR process focused attention on the election to come and produced a nagging suspicion, where there had been none, that the political pendulum won’t swing quite far enough to unseat this Government. Remember it didn’t in ’92. There would be a recalculation of the odds. 3.8% was a yield for a Tory Chancellor.

  4. Still think it may have been ‘political’. Have a look at this report of the latest ICM poll on UK Polling, it’s date of publication and the time when insiders will have known the broad findings.
    The gap is narrowing and the herd’s presumptions are changing.
    As I have said for some time, this is all very similar to the relationship between economic and political fortunes between the ’68 devaluation to the June 70 election and ’08 to ’10

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