Frank Field MP
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Judgement of Solomon

It is a distraction whether or not the prime minister utters the c-word today - or any other day come to that. The plain fact is there will be mega cuts. Two crucial questions are how big they will have to be to restore some sanity to the national accounts and when should they start?

A weekend poll shows the strong preference of voters for public expenditure cuts rather than tax increases. What I don't know, but will be crucial politically, is whether these are views based on today's phoney war over cuts or whether they are based on a more accurate appreciation of just how serious the position is.

This economic phoney war atmosphere has been made up from two contradictory forces. Voters have been bombarded with tales of extreme economic woe ever since Northern Rock bit the dust.

One of the prophecies was a recession as bad as that following the 1931 crash. In terms of national income falls that prophecy has already been borne out.

But we are now much richer so that cuts in national income fall on a much fatter body. Likewise, the government has been reflating, borrowing on a scale unknown before and printing shedloads of money. So many of us are still being protected.

At some time these policies will have to go into reverse and then there will be major economic hardship that could change the public's view on cuts. The question is, when will the cuts strategy be implemented? This debate has so far been won by those who argue that it is wrong to cut in times of recession. To do so would risk any recovery, they say. This is important, but only one dimension of what should be a two-dimensional debate. Not cutting now might also harm the recovery.

Each week the government unloads another shedload of debt on to the gilts market. There will be at least 38 more auctions between now and the expected date of the next election. Up until now the main buyer of this debt has been the Bank of England, which has been printing money to make these purchases. It has an Alice in Wonderland quality about it, doesn't it?

But the Bank has now declared a cessation to printing yet more money. Very shortly, therefore, the market will be tested on who is out there that wants to buy British government debt. All of the countries in the G8 group are also in the market selling debt and we will be trying to borrow a higher proportion of our GDP than any other G8 country.

Selling this debt will be far from easy. Long-term interest rates will inevitably rise, which will make borrowing capital more expensive and so harm any potential recovery.

One way of moderating the rise in long-term interest rates would be to convince the market that the government is serious about balancing the national accounts sooner rather than later and has published a plan to achieve that goal. Moreover, lower interest rates will mean that a smaller proportion of future national income will be impounded to both debt charges and repayment costs.

Britain is therefore in a lose-lose situation. To cut too early might harm a sustained recovery should that be forthcoming. Not to begin cutting soon will push up interest rates, which will not only harm any recovery but see a larger proportion of the country's future living standards confiscated to pay the money lenders.

For reasons that are obvious to readers of this blog, I favour an early cut strategy. For the gilt market to strike and not to buy future debt will have catastrophic economic and political consequences here. This is the real danger that has still to be registered in a tired and still very timid debate over public expenditure cuts.
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Showing comments 1 to 3 of 3

Frank, I hope your wise and thoughtful words are being read by your colleagues in the government. However, regrettably, I don't expect that they will agree with your recommendation. You are also absolutely correct in your description of the current debate over public expenditure cuts as "tired and very timid". We need more voices like yours to clearly and cogently explain the nature and scale of the problems facing the British people and the actions necessary to properly deal with them.
Comment by Anonymous on 15 Jul 2011
Roaring inflation will be the politicians' answer. Of the three options available for dealing with huge national debt (default, repay, inflate), it's always the easiest political 'sell'. If things get bad enough, it's the only feasible political sell. So a word to the wise: Get the hell out of sterling-denominated assets. Fast.
Comment by Anonymous on 15 Jul 2011
Whatever the policies adopted, they have to generate confidence. How can they when there HAS to be an election within 8 months? Better for your friend Gordon to win and get a mandate than continue like we are.
Comment by Anonymous on 15 Jul 2011

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