Tag Archive: coalition government



 

Osborne's Autumn Statement speech revealed more borrowing

Switch in focus from growth

Austerity is still the answer but now the question has changed. ‘How do we rescue the country’s economy, eradicate the deficit, and return to growth?’ has been replaced with, ‘how do we ensure that the cost of borrowing doesn’t increase?’

 

When governments borrow money they do so by selling bonds (gilts). These can best be described as IOU’s where investors buy a certain amount of bonds to be repaid, plus interest (yield), over an arranged period of time. Keeping down this yield is paramount to a government’s ability to repay its debts. If the government becomes insolvent then it will default and trigger the kind of austerity measures currently seen in Greece.

 

Britain’s coalition is trying to ensure that the country is still seen as a safe haven for money markets. When investors suspect that a country is unlikely to be able to repay its debts then credit lines dry up and the governments have to offer higher yields to convince potential investors that the extra reward merits the enhanced risk. An example would be Italy where a lack of liquidity has led to yields of eight per cent to be repaid in just three years. This contrasts with Britain’s relatively luxurious position of selling, at just over two per cent, bonds that don’t have to be repaid for a decade.

 

So Chancellor George Osborne is understandably keen to maintain cheap borrowing levels and avoid massive interest repayments.

 

How is the coalition maintaining market confidence?

 

Just how one keeps borrowing down is the dividing point in the country’s political landscape. The Conservative led government hopes that by maintaining their austerity programme to eliminate the structural deficit over the course of the parliament, they are keeping the faith of the markets. But austerity comes hand in hand with lower investment, lower spending and lower growth. The UK economy has flat lined and as a result borrowing has to increase to fill the void left by lower tax revenues. The government’s argument is that avoiding austerity measures and allowing the yield on UK bonds to grow by just one per cent would mean every family in the country paying an extra thousand pounds so Britain could repay its debts.

 

The Director of the Institute for Fiscal Studies, Paul Johnson, appearing on the BBC’s coverage of the ‘Autumn statement’, noted that due to declining growth increasing the amount Osborne has had to borrow, he has to factor in more cuts than previously to eradicate the structural deficit:

 

“He’s had to take another 15 billion [pounds] away from public spending in the years after the next election. Now he hasn’t told us how he’s going to do that, he’s simply said that in his forecast he’s taking an extra 15 billion away, that’s enough for the OBR (Office for budget responsibility) to say he will meet his target. Had he not pencilled that in the OBR would have to have said he’s going to miss his targets.”

 

Osborne’s analysis is that should this happen the effect would be to shake the markets’ confidence.

 

 

So what of the opposition?

 

Polls are currently reflecting the public’s lack of faith in Labour’s economic plan. ComRes found that 21 per cent of people trust Labour with the economy whilst 50 per cent do not. Ed Balls’ argument for his economic philosophy has hit a wall. The party’s message is that spending more and therefore increasing borrowing costs will lead to lower borrowing costs. On the surface the claim appears illogical and they have failed dismally in getting across any sort of economic argument to support the claim.

 

The coalition has found political capital in claiming that despite inheriting a huge deficit they have maintained a low level of borrowing costs. This appears true when compared with European neighbours like Greece and Italy, but does this tell the whole story?

 

Today’s bond market:

  Price Yield
US Gov 10 yr 100.00 2.00
UK Gov 10 yr 113.27 2.23
Ger Gov 10 yr 97.23 2.31

 

The above graph shows that the UK does indeed borrow a similar amount to both the USA and Germany. If the theory of cutting the budget deficit to increase the attraction to borrow follows, then you would expect them to have similar budget deficits:

 

Budget Deficit (% of GDP)

US 9.3
UK 8.7
Greece 7.0
Germany 1.1

 

So far so good.

 

But the US, despite the best efforts of the Republican Party, isn’t following a similar austerity plan to keep favour with the markets.

 

Upon arrival to the White House President Obama initiated an $800bn bill and recently fought hard for a $447bn package of tax cuts and government spending. Hardly austerity measures and when combined with the life and death struggle to raise the debt ceiling, which had it not been achieved would have led to an American default, would surely deter any nervy investors. Yet that isn’t the case, so Chancellor Osborne’s theory of ‘austerity or exorbitant borrowing costs’ appears to fall down.

 

The example of America’s economic situation is much more consistent with Britain’s position than the European countries. Britain hasn’t defaulted on its debts for 300 years, it has its own currency, an independent central bank and control of its own monetary policy. Our flexibility is far greater than the likes of Italy and Greece and is as such a far safer economy to invest in.

 

Economist Paul Krugman believes austerity rain will lead to an austerity flood

Labour will need to work hard to convince the country that stimulus is the way to go with even former Liberal Democrat leader and Keynesian, Lord Paddy Ashdown, subscribing to the government’s argument. During a debate with Alistair Darling in response to the ‘Autumn Statement’ he reiterated the party rhetoric; “debt as high as Italy yet borrowing rate lower than Germany.” Labour has to show that this is a distortion of cause and effect to gain any credibility for their argument. Ashdown’s party has always wanted to join the Euro despite the disadvantages of the loss of a sovereign monetary policy. These monetary conditions are again ignored in the austerity hypothesis. Italy cannot print money into the system in order to devalue; it has no control over interest rates and is tied into a political entity that is forcing austerity measures that only increase the likelihood of default and further disincentivise investors.

 

The 2008 Nobel Prize winning economist Paul Krugman states in his blog: “it turns out contractionary policy is contractionary after all. As a result, despite all the austerity, deficits remain high. So what is to be done? More austerity!”

 

Perhaps the Labour Party would be well served to adopt this point in favour of the distinctly less successful ‘too far too fast’ campaign.

 

 

 

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The people have spoken and they have unanimously decided…. NO!!!

No to what? Well obviously no to political reform. But also a great big vocal no to politics as a whole. Here are some of the other questions posed at the ballot that were rejected.

Q. Do you have any sympathy for Nick Clegg’s scapegoat status?

A. NO!! One thing is for sure, Liberals got hammered in England, Scotland and Wales.

Q. Have you given up on government?

A. NO!! In England Tories are still firmly in control of local councils and whilst they expected to lose hundreds of seats they actually gained 81.

Q. So do you support the government?

A. NO!! We hate tuition fees, we don’t like the cuts but we blame the Lib Dems and Labour so Tories have got through the local council elections unscathed.

Q. Have you forgiven Labour?

A. NO!! Labour fell well short of the 1,000 extra councillors they wanted to gain in England and they took a beating in Scotland courtesy of the SNP.


The public may not know what it wants but they know what they don’t want and that’s everything currently being offered.

The traditional progressive movement in England has been given a resounding kicking. The Liberal Democrats got annihilated in the local council elections losing just shy of 700 seats and 9 councils. Even here in Sheffield, where it was expected that things would be bad with Labour gaining control of the council, it was far worse than expected. Nine councillors were lost and many other wards saw Sheffield’s lowly conservatives overtake Clegg’s men.

And then there was AV. The polls seemed to agree that there was no hope for the attempt at political progression putting it 18 points behind the No2AV campaign. In actuality it was far worse than this as 68 per cent voted against thus giving Clegg his second kicking and leaving his party at a crossroads.

Can he lead Scotland to Independence?

Scotland

The one concrete result we have got is in Scotland. Ed Miliband wanted the Labour recovery that aims to eventually see them retake Westminster, to begin in Scotland. Such talk indicating Miliband’s patronising belief in Scotland’s subsidiary status didn’t have the desired effect and pushed the voters towards Alex Salmond’s ‘putting Scotland first’ approach. The Scottish Nationalist Party stormed to an impressive electoral dominance destroying the labour party who so long have ruled the lands north of the border. However, whilst the SNP are experiencing a surge in support, this may not actually point to a thirst for progression. Whilst the First Minister, Alex Salmond, now has a position to implement a referendum for independence it is not at all certain that if he does he will win. The result was massive for the party but if they don’t win a referendum on independence then it could be assumed that the results of the Scottish assembly elections were an anti labour and Westminster vote more than a victory for SNP. Salmond is a heavyweight politician operating in a pool of small fish. And whilst clearly he has voter appeal he may have benefited more from poor labour tactics than having successfully united his country over political reform.

England

Liberal Democrat attention is now being switched to the next great battle. NHS reforms will serve as the latest battleground in order to refocus and regroup the party. I have always resisted previous talk of the coalition government not lasting as ‘too early to say’ but now the government is ‘mission creep-ing’ its way to internal crisis. Divisions that were previously confined to the backroom are now open to the public. Aside from the AV campaigns and figures such as Chris Huhne, and Paddy Ashdown throwing tantrums the formerly silent but lurking Tory backbenchers are creeping into the limelight. When asked about the longevity of the coalition government conservative Peter Bone MP said: “I don’t think it will go on for the full five years that’s for sure. The only reason for the coalition was to come together and sort out the economic mess that labour left this country and once that’s done there’s absolutely no need to continue with the coalition.” He went on to say: “Liberals have got to row in behind the government and stop bleating”. This opinion is reflective of so many Tory backbenchers who don’t see this as a coalition government, but a conservative one with a few refugees thrown in to provide Mr Cameron with the votes he needs to do the bidding of middle England.

Liberal Democrat MP Norman Lamb, most famous for threatening to resign unless changes were implemented to Andrew Lansley’s NHS reforms, stated today: “We have become a human shield for the conservatives”. There is no doubt this is true and it’s hard to see what they can do to change that whilst remaining in government. Mr Cameron won’t throw them any bones. The Tory backbenchers won’t allow it. They’ve come to the fore as they did to derail John Major over the EU. The current PM will be wary of his history, internal party rebellions destroyed the two previous conservative PM’s and now that the Liberal Democrats are so weak and Labour are still a long way back on their road to recovery, his primary concern is to appease his own party.