Sunday, November 16, 2008

The indiscreet charms of George Osborne

Much has been made in the British press of the comments by George Osborne on a future British currency crisis, what he called "having a proper sterling collapse, a run on the pound". Leaving aside- for the moment- the convention which Osborne has broken that opposition politicians do not talk down the British economy, let us examine what George Osborne is saying.

On Friday, Sterling hit a a six and a half year low against the US Dollar and a record low against the Euro. The immediate cause was a series of extremely gloomy predictions for the UK economy and the expectations, that despite the 150 basis point rate cut, there could still be further reductions in British interest rates. None of this, you note has much to do with UK government borrowing. However the risk of a run on the Pound that George identifies is based on the idea that the Labour government intends to make a significant fiscal stimulus, in effect following the Lib Dem line that significant tax cuts are now required. However, whereas the Lib Dems would make such cuts broadly revenue neutral, Labour intend to increase government debt. It is this increase in government debt that Mr. Osborne suggests is dangerous.

However, the fact is that while the short run revenues of the British government are not looking particularly healthy, the overall level of government debt is- in international terms and even including Northern Rock- by no means dramatically out of line with most industrial nations. So, while I do not advocate Labour policy, Mr. Osborne is actually just plain wrong when he suggests that an increase in overall government debt is an imediate threat to the British currency.

However by suggesting that the Conservatives would not follow a loser fiscal regime, and he can not offer tax cuts, he must now do worse and now indicate what spending cuts he would implement as Chancellor. By essentially saying that there is no room for any tax stimulus he is arguing that not only would he maintain taxes at current- pretty punitive- levels, but would also most likely cut expenditure budgets, just as the UK economy is entering an extremely deep recession. The impact of such a policy would certainly deepen the impact of the recession.

In short it is not Labour who are being irresponsible here, it is Mr. Osborne for ruling out tax cuts and tacitly saying that he would significantly reduce government expenditure who is being willfully reckless.

We have already seen the price that George Osborne has paid for his indiscretions on Corfu, but this policy blunder is not- as Andrew Rawnsley argues in today's Observer - a strategic positioning, it is a mistake that undermines still further Mr. Osborne's credibility in the eyes of the City and the global economy.

The fact that Mr. Osborne broke the political convention of avoiding negative comment on the economy simply undermines the risk that he has taken. While I do not doubt that the Conservatives will rally round their wounded Shadow Chancellor (as Iain Dale has loyally done today) the fact is that Mr. Osborne has put his foot in his mouth. He- yet again- shows poor economic and indeed political judgement.

There may yet come a time when it is not Mr. Osborne's judgement that is under most scrutiny, but the judgement of David Cameron for keeping the indiscreet Mr. Osborne at his post.

3 comments:

Newmania said...

I think we are about to see an adjustment because we are obviously going to have to have tax cuts . What we cannot afford to do is have un-funded tax cuts in other words there must be ral cuts to the Public Sector who must take some of the pain.

"The immediate cause was a series of extremely gloomy predictions for the UK economy and the expectations, that despite the 150 basis point rate cut, there could still be further reductions in British interest rates. None of this, you note has much to do with UK government borrowing. "

That is wrong , stirling has been slipping for long time and given the none to clever state of the alternatives that is deadly judgement. It certainly does have something to do with borrowing as well as the deep problems of overegulation that have turned off sustainable growth.

It is not just a question of a flashy burst of demand what about all the business that have not started .What about all the risks that have not been taken . Without the supply side right demand management is just shifting chairs around on the proverbial Titanic .

Cicero said...

Of course I agree that simple demand management is not the answer- which is why I was so critical of the Conservative unfunded tax cuts which they proposed in their 2005 manifesto.

The Lib Dems proposals ARE funded- their net revenue effect is neutral. Osborne is so far tying himself in knots and has already conceded that the effect of his current policies would be a reduction in government expenditure- a very bad plan in the current conditions (though obviously needs work eventually).

kiki said...
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