Britain does not need another George Osborne

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Mr Sunak is wrong in pushing for the most aggressive, front-loaded, fiscal austerity in the developed world, before the economy has fully digested the double blows of Covid and Putin’s energy war.

The chief reason why the OECD expects the UK to be the G7 laggard next year with zero growth is because this country is tightening harder than the rest. “Overall, the fiscal stance will be contractionary. The Government should consider slowing fiscal consolidation to support growth,” it said.

As for the timing, Mr Sunak wishes to impose a pre-emptive fiscal squeeze just as the international business cycle rolls over and the world economy slides into a secular downturn. Commodities are mostly in free-fall. “The Treasury needs to think very carefully about austerity right now,” said David Owen from Saltmarsh Economics.

“The whole macroeconomic stance is wrong,” said Michael Jacobs, professor of political economy at Sheffield University and a former Downing Street strategist. “Sunak has made debt reduction his overwhelming priority but the much greater risk is recession.”

Indeed it is. The money supply is collapsing. Simon Ward from Janus Henderson says his key measure of the UK’s money supply – six-month real M1 – has plunged into deep contraction. “We are probably in a recession already, just waiting for the data to confirm it,” he said.

The headline inflation scaring everybody today is the legacy effect of excess monetary stimulus two years ago. Money has since gone into full-throttle reverse worldwide. By next year large parts of the global price basket could be in outright deflation.

Mr Sunak risks repeating the ill-judged austerity of George Osborne from 2010 to 2015, when the Treasury pushed fiscal tightening too soon and beyond the therapeutic dose, undermining social cohesion and inflicting great damage on the constitutional fabric of the Union for no worthwhile purpose. 

The policy was self-defeating even on its own terms. The long dragging conditions of semi-slump – to borrow from Keynes – caused the debt ratio to creep up further, just as it did after the budget cuts of the 1920s.

The risks are lower this time and one lesson has at least been learned: Mr Sunak has promised to keep public investment at 3pc of GDP through thick and thin, the highest level since 1955. But it is still a contractionary policy,  into the teeth of an enveloping downturn.

Prof Jacobs accused the Treasury of propagating “scare stories” about debt service costs in order to bounce the country into accepting this ill-timed austerity. The latest trick is to a claim that the interest burden is suddenly vaulting into the stratosphere due to inflation, more than doubling to £87bn a year as the bill rises on index-linked Gilts. 

This mixes up actual payments with the accounting accrual cost of bonds that mostly do not mature until deep into the 2030s, and will be repaid from an equally-inflated base of nominal GDP, at no net loss. The overwhelming effect of inflation so far has been to whittle down the real burden of the debt. It is a key reason why the ratio is falling so fast: 2020 (103pc), 2021 (95pc), 2022 (88pc), and 2023 (83pc), on the IMF metric. 

This method of stealth debasement is more or less how the UK paid for the Second World War, which left a national debt above 250pc of GDP. A bout of post-war inflation halved the ratio by the late 1950s. You can argue that this was immoral: patriotic owners of War Loan and Gilts were expropriated. But it certainly solved the debt problem.

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