Earlier in October, the week of the Tory Party Conference, was an awful week for George Osbourne and the Tory run Treasury. I wonder if it’s his “Black Wednesday”. Moodys, the credit rating agency downgraded most of Britain’s banks, which was also covered in the Guardian, and he gave permission to the Bank of England to launch a £75bn Quantitative Easing programme, covered with varying degrees of approval in the Guardian, the FT, and Reuters.
How big a deal is £75bn? The Office of Budget Responsibility at the rather marvellously named site http://budgetresponsibility.independent.gov.uk/ predicts that the Public Sector Borrowing Requirement (the Deficit) will be £121.8bn. This is despite a worse than expected August. This is a reduction of £14.9bn from last year. So the amount being ‘released’ to the banks by the Bank of England, on Osbourne’s say so, is 62% of the deficit, or just over 5 times the level of public expenditure savings planned for this year. William Keegan, in his Sunday Column in the Observer also points out that they could have paid off the UK’s consumer credit card debt (£67bn) and had some change left. No wonder the proposal that we should pay of our current account debts was pulled from Cameron’s speech to the Tory party conference earlier in the week.
What is QE? The Bank of England states on its site, on a page called, Quantitative Easing Explained,
The MPC boosts the supply of money by purchasing assets like Government and corporate bonds – a policy often known as ‘Quantitative Easing’. Instead of lowering Bank Rate to increase the amount of money in the economy, the Bank supplies extra money directly. This does not involve printing more banknotes. Instead the Bank pays for these assets by creating money electronically and crediting the accounts of the companies it bought the assets from. This extra money supports more spending in the economy to bring future inflation back to the target.
Osbourne has claimed he rescued Britain from the vagaries and predations of the Bond market by launching his ‘austerity budget’.The political choice was presented in 2010 as eliminating or halving the deficit within one parliament, and the extent to which the Government uses tax increases as opposed to expenditure cuts. During the election, Labour then led by Gordon Brown argued that the priority for the Government was ‘to secure the recovery’ before addressing the deficit. This was the right thing to do, and should be the government’s No. 1 priority. It clearly isn’t as everyone knows that government austerity deepens a recession. The Tories have argued that the public sector is ‘crowding out’ private sector growth, although it looks like they are arguing the same ‘supply-side’ economics that failed under Thatcher; the private sector can’t grow if they have no customers. If the economy doesn’t meet the government growth targets, then government income is lower than planned because taxes are levied primarily on economic activity i.e. work and private expenditure, and thus the deficit grows. On the expenditure side, if the economy doesn’t grow, then government welfare payments, job seekers allowance, social assistance and housing benefit payments grow, and again the deficit grows. This is the Tory’s “Double Whammy”. The third bad economics is that if price levels grow faster than the economy, then prices linked welfare payments including pensions will grow faster than the tax receipts and the deficit worsens.This is why even a government that claims to prioritise “deficit reduction” needs a growth plan.
Some commentators, that claim to be on the left and friends of Labour, including some on Labour Uncut and even the New Statesman seem to be trying to put the debate back into the “tax or spend” box, along with their reviews of St. Alistair Darling’s memoirs. They are wrong to do so; Labour was and remains right about growth and the Tories are wrong, and most importantly the Tories public agenda of a strong, debt free economy is not possible without growth. The Labour election campaign made that point at the time of the election and Ed Balls repeated it during the Labour leadership elections, on hustings and in his ‘Bloomberg’ speech when he said the choice is not just one of tax or cut, but one of growth.
There might have been one get of jail free card, which would be to export more, to rely on the demand of our international trading partners. However this is a ‘beggar my neighbour’ policy, which is likely to find our trading partners retaliating because it only works if we grow our exports faster than we import; what do think our partners are trying to do? We would be in effect trying to export our unemployment. There is also another barrier to this policy. When Labour was in power in 2008 the British Government co-opted the G7, G8 and G20 to rescue the banks, and reflate the world economy, to “secure the recovery”.
The chart below shows how this worked in the UK, and the effect of Osbourne’s “Emergency Budget”.
Figure 1: Slump and Recovery and ….
The leadership of the World’s political economy is now more strongly right wing, and austerity has become the political consensus, particularly in Europe, led by Osbourne, Sarkozy and Merkel. (West to East). The British Government is now boasting of its austerity programme and safe public finances and argues that Europe should follow their example. If they do, British business will find it harder to export as European demand is suppressed. Brown’s Labour saved the banks, private (and public-sector funded) pensions and had the economy growing. It’s Cameron, Osbourne, Clegg and Cable that have implementing the most vicious UK austerity programme ever, and by persuading our trading partners to do the same they will cause our growth rate to slump; there’s no escape route, we can’t export out of the declining UK demand. Supply side economics is hope & faith.
We need growth; no-one has ever succeeded in rectifying their public finances without it, austerity is bad policy, and not just because its unfair.
The Tories argue that there is a crises of debt, and that they needed to implement an austerity programme to regain the confidence of the Bond market. An analysis of the UK national debt shows that the Debt to GDP rate in the UK is about 60%. This is an increase over the last couple of years but not high in terms either history, or many of our international competitors and partners. ( I planned to write an analysis on the structure of the UK National Debt, but the UK Debt Managaement Office (DMO) site doesn’t play nicely with my technology so I hope to return to it in another article.) Enough to say, that our level of debt is low, the repayment schedule is relatively even and some of it with ultra long repayment terms.
Chart 2, below, shows the level of National Debt to GDP and the forecasted change.
Figure 2: UK National Debt/GDP ratio
This is the growth/debt paradox.An economy needs to grow faster than its debt interest rate, otherwise, it will need to borrow to pay its interest. It has the alternative, of cutting its expense, but this will increase the deficit, which increases the debt, which requires more cash to pay increased interest, which allegedly requires more austerity; it’s a vicious circle and this is the policy of the Coalition.
The bond markets and ratings agencies don’t like Osbourne or Cameron. If growth stalls to the point where interest can’t be payed,(or more accurately in the first iteration, they need to borrow to pay interest) then they’ll call it as they see it, and Osbourne’s claims to have placated the Bond Market will look pretty stupid. In fact, they may not wait, the agencies caution on the UK economy and its banking system are partly based on their views of the future and the political context in which the economics occurs. The International Monetry Fund is already cautious, and in its last report on the world economy it stated that if UK Growth fell any further, then austerity should be abandoned (or at least suspended). This was reported in the Guardian in an article headlined IMF cuts UK economic growth targets.
Osbourne compounded his myopia by promising to stimulate growth by making it easier to sack people. We need growth, and growth means jobs, making it easier to sack people is jst playing to a minority, yet very rich, gallery.
Figure 3: The average wage in the UK is £25,000…I don’t see anyone else laughing
It’s not welfare that caused this problem, it’s not Labour’s so-called profligacy, this slump is the result of Tory and LibDem policy.
Tory economic policy has no clothes.
Figure 1’s sources are the Bank of England, Wall Street Journal (Libor) and Office of National Statistics (Growth). The growth figures are reported as absolute growth per. quarter, I have multiplied this by four to give an annual figure so that it can be compaed with the interest rates which are always quoted on an annual basis.
The source for Figure 2 is http://www.ukpublicspending.co.uk.
I started writing this the week of Tory Party conference but these things take time and research. By the time I published the September inflation figures were published, and reported in the Guardian in an article highlighting the highest inflation figures since the Tories were last in power. The New Statesman has published their “Plan B for Gideon” article with 10 of the UK’s top economists making suggestions for growth, also Prof Wren Lewis from Oxford has published “The Case against Austerity”, the Item Club, publish their forecast here…, and Robert Skidelsky publishes his review in the New Statesman entitled, “The Boom was an Illusion”, where he predicts that China will slow down, although he also explains the economic theory behind this road kill of an economic policy. But if China slows down we’ll all be up the proverbial creek.
Next, maybe UK debt!