Grow Faster, Go Further

Growth is anaemic, that much of the Balls critique is true, the cause is not the government’s spending cuts, they are a mere 1% of GDP. Osborne has made mistakes, hiking VAT hit the High Street by taking money out of the real economy whereas QE at the moment only puts money into high finance money markets. Back in June the IMF issued a report recommending

“…tax cuts are faster to implement and more credibly temporary than expenditure shifts and should be targeted to investment, low-income households, or job creation to increase their multipliers… Simultaneous adoption of deeper long-run entitlement reform would be desirable to safeguard fiscal sustainability and market confidence…”

It also pointed out that

“The level of public spending as a percentage of GDP in our forecast has reduced by about half a per cent of GDP as compared to the previous fiscal year. However, it remains very far above the pre-crisis levels of spending and represents a long-term high in spending. It’s important to maintain that perspective”

Plan B, the Balls plan for bankruptcy and bond market collapse, is for higher taxes and more spending, this can be dismissed. Osborne is right when he says the international bond markets would crucify Britain if he switched to Plan B, for as Jeff Randall points out this morning

“At the moment, the Chancellor is pulling off a brilliant confidence trick: persuading the markets that Britain remains a triple-A credit, able to borrow on the same terms as Germany, while managing an economy with an inflation rate 66% higher than the eurozone’s average, and a national debt that is forecast to hit £1.32 trillion in 2015, nearly 40% greater than today.”

Tricky. Gordon Brown inherited an economy in a sweet spot and left an economy drowning in debt, Osborne believes he must bear down on the deficit to keep the confidence of the bond markets. Yet a paper produced by Dr Tim Morgan of bond brokers Tullett Prebon argues that if the government is going to miss its deficit reduction target anyway, what option would placate the bond markets more?

  1. “Britain has missed its deficit target because growth hasn’t happened”
  2. “Britain has missed its deficit target because the government failed to cut spending sufficiently”
  3. “Britain has missed its deficit target because taxes have been cut in pursuit of growth”

We’re currently in the first situation, the second situation is unpalatable to the government, the LibDems don’t have the stomach for a shock doctrine style short term austerity programme. Balls advocates stimulus in the form of higher spending, no one in government is advocating the alternative, which is to stimulate the economy by cutting taxes instead. Of course if we also rolled back government spending there would be more room for tax cuts to boost consumer confidence and the economy, without matching spending cuts the deficit will rise. Osborne is going to miss his deficit target regardless of which option he takes, it wouldn’t scare the bond market so much if cut taxes in pursuit of growth…




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Quote of the Day

Heather Wheeler talks to Burton Mail about her tweet…

“It was a tongue in cheek pop after the European Parliament tweet – it was purely that. I also wanted to congratulate Team GB on a brilliant result and thirdly congratulate the Commonwealth countries who also did very well. Fourth, I am also looking forwarded to establishing new trade agreements. That was it – nothing more. Let’s just enjoy the summer!”

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