The Tories: Talking Britain Down

The Tories: Talking Britain Down

• This month, the Conservatives have used very strong language to talk up the danger of the deficit
and the level of national debt, putting particular emphasis on the threat posed by the reactions of
financial markets:

“The economy is the big issue at this election and in our view, and we have been absolutely consistent about this, the deficit is the biggest threat to our economy. Our deficit is holding back confidence, its holding back investment, its holding back growth. It is a dark black cloud hanging over our economy and we have got to deal with it.” David Cameron, Thomson Reuters event, 02 March 2010

“Indeed we will not have any meaningful growth unless we show we can deal with our debts. For it is the lack of a credible plan to deal with the deficit that is already pushing up market interest rates, undermining the monetary stimulus that is supporting the economy, and sapping the confidence of investors and consumers.

It is the lack of a credible plan that has the credit rating agencies threatening to downgrade us unless action is taken urgently.” George Osborne, Mais Lecture, 24 February 2010

“Those who say we should simply ignore the markets are siren voices, luring us onto the rocks. For an economic policy maker to rail against the unpredictable nature of financial markets is like a farmer complaining about the weather. A loss of market confidence could force dramatic tax rises and spending cuts that were indeed savage and swingeing. That would represent a loss of economic sovereignty. And those cuts would be far larger than the actions that are needed now in order to retain our economic freedom in the first place. Far better to be prepared and protect ourselves against the storm.” George Osborne, Mais Lecture, 24 February 2010

“And I am not prepared to be the Chancellor of the Exchequer who puts the economic destiny of our country and its millions of citizens into the hands of bond markets and stands by helpless as they extract their price.” George Osborne, Speech to Conservative Party Spring Forum, 27 February 2010

“Are they really saying that a new government, elected in the spring of this year, with a mandate for change, with the credit rating agencies hovering and the markets waiting, should delay taking any action on the deficit until the spring of 2011?” George Osborne, Speech to Conservative Party Spring Forum, 27 February 2010

• However, international experts believe this is a gross exaggeration. George Magnus of UBS
described the UK’s finances as “stretched but sustainable”, while Nobel Laureate economist Joseph Stiglitz reportedly accused the Conservatives of “fear mongering”:

[George] Magnus [senior economic adviser to UBS], who was among the signatories of a letter to the Financial Times last week in support of a delayed fiscal tightening in line with Labour's plans, said that UK authorities still had the confidence of investors. He said they understood Britain's public finances were "stretched but sustainable". Daily Telegraph, 25 February 2010, http://www.telegraph.co.uk/finance/currency/7310031/Tory-spending-cuts-risk-sterling-crisis-claims-UBS.html

Second, Britain’s level of government debt is not out of control. The net debt relative to GDP is lower than the Group of Seven average, and on present government plans it will peak at 78 per cent of annual GDP in 2014-15, and then fall. Even at its peak, the debt ratio will be lower than in the majority of peacetime years since 1815. Moreover British debt has a longer maturity than most other countries, and current interest rates on government debt at four per cent are also low by recent standards. Lord Layard et al, Financial Times, 19 February 2010

“I think it's fear mongering and I think the notion that the rating agencies, which did such a terrible job over rating all these products, that we should show deference to their judgement of good economic policy, seems outrageous.” Joseph Stiglitz, New Statesman, 10 February 2010, http://www.newstatesman.com/blogs/the-staggers/2010/02/joseph-stiglitz-osborne-plans

On the suggestion, put about by George Osborne among others, that Britain is at risk of default: “I say you're crazy - economically you clearly have the capacity to pay. The debt situation has been worse in other countries at other times. This is all scaremongering, perhaps linked to politics perhaps rigged to an economic agenda, but it's out of touch with reality. One of the advantages that you have is that you have your own central bank that can buy some of these bonds to stabilise their price.” Joseph Stiglitz, New Statesman, 10 February 2010, http://www.newstatesman.com/blogs/thestaggers/2010/02/joseph-stiglitz-osborne-plans

“There is no doubt the UK data is weakening a little more than expected and more than expected compared to the eurozone and the US data. However, the talk of a GBP crisis seems like hysterical clap trap.” David Bloom, global head of FX research for HSBC, 01 March 2010, http://ftalphaville.ft.com/blog/2010/03/01/161656/talk-of-a-gbp-crisis-seems-like-hystericalclaptrap/

• In a recent piece of analysis, Mansoor Mohi-uddin, chief currency strategist at UBS, argued that
a damaging market reaction could be triggered by action in the opposite direction, by cutting public spending too soon. If austerity measures were to push the economy back into recession, this would likely provoke a ‘savage’ reaction in the currency markets:

“In contrast, if premature fiscal tightening after this year's election drives the UK economy back into recession, the reaction in currency markets is likely to be savage. Investors would question the government's ability to pay back its bonds if the economy starts to contract again. The MPC would have to resume buying gilts to loosen monetary policy in the wake of weaker growth. But markets would suspect the authorities had no choice but to print money to meet their debts. This would likely induce a crisis for sterling, not a textbook adjustment.” Mr Magnus, who was among the signatories of a letter to the Financial Times last week in support of a delayed fiscal tightening in line with Labour’s plans, said that UK authorities still had the confidence of investors. He said they understood Britain’s public finances were “stretched but sustainable”. George Magnus and Mansoor Mohi-uddin, UBS, quoted in Daily Telegraph, 25 February 2010, http://www.telegraph.co.uk/finance/currency/7310031/Tory-spending-cuts-risk-sterling-crisis-claims-UBS.html