Attacks on Osborne for "talking down Sterling" are absurd, for at least three reasons:
- We don't have a fixed exchange rate, so the issue of undermining confidence in the will of politicians to maintain the exchange rate simply does not arise. It is entirely the job of Opposition to challenge the government's economic policies. If only they had chosen to do so over the nationalisation of the banks, instead of proclaiming (unilateral) bipartisanship, we might be slightly better off than we are now.
- Having a weaker exchange rate at this time would (if it made any difference at all, which is less obvious than usually assumed) probably be rather helpful to the economy, given that we are struggling against controlling forthcoming deflation.
- Like virtually every other politician, because we do not have a fixed exchange rate and hence the level of the exchange rate is not a political question but a market one, George Osborne has no idea whatever where Sterling is going, and does not have sufficient credibility to move markets. Financial markets are not interested in George Osborne's foreign currency speculations. It is just possible, I suppose, that he might have better information than the Market concerning the likelihood and size of any spending increases or tax cuts Alistair Darling is about to announce - but he has no idea whether these announcements would be greeted by a rise or fall in the value of the pound.
On the other hand, Osborne's comments are plain daft. Really. I take no pleasure in disagreeing with Osborne so blatantly - and have waited until probably no-one is looking before doing so just in case there were the remote possibility someone might care about what I think.
Let me do my level best to construe something positive in what he says. If the government proposed to expand spending - providing a fiscal stimulus in that way - then there could be the concern that that higher level of government expenditure would undermine the sustainable growth rate of the UK economy over the longer term. Having raised spending it could be hard to get it down again. If the sustainable growth rate of the UK economy fell then, indeed, the value of the pound would fall because future returns on UK investments would not be expected to be as high. At a stretch (and it would be a big stretch) one could imagine the UK growth rate falling by so much that people started to worry marginally more about the chances of the government paying back its debts.
Perhaps there's something in this line. But if we believe that then why, a few weeks back, when the government floated the idea of expanding government expenditure (and I led various attacks on the proposal) was the Conservative position that expanding government expenditure was, in principle, a rather good idea but it might be difficult in practice to "reschedule" expenditure sufficiently rapidly to have an effect on the recession? Manifestly our Front does not believe that expanding expenditure would undermine the sustainable growth rate of the economy - indeed, until very recently at least (I take it that our position has now changed, but I'm not quite sure?) we were proposing to match the government's proposed further rises in expenditure and vigorously put down anyone that suggested that such rises would have a cost in terms of growth.
So, our position doesn't seem to be anything to do with expenditure rises. We don't seem to mind them (even if they result in more debt?). Our position appears to be something to do with cutting taxes funded by debt (though why that's worse than expenditure rises funded by debt is competely beyond me - I shall proceed on the assumption that we just don't like debt, and our previous support for the principle of increasing debt by raising public expenditure was just one of those embarrassing incidents best skated over). But what do we think about extra debt? Government borrowing is going to rise rapidly, from (excluding banking injections and nationalisations - which we shouldn't but I shall for now) around £40bn in 2007/8 to some £65bn-£70bn in 2008/9 and to £100bn in 2009/10, even before any further fiscal stimulus. These are eye-watering figures, and reflect a massive policy failure by Brown's administration. But what is the Conservative position on debt? It appears to be that we should go for whatever number is produced automatically by the recession. Not a penny less - we should have no tax rises or expenditure cuts to try to keep debt down. And not a penny more - for that would be "fiscally irresponsible". I cannot see how that makes sense, without further argument. We don't know very well what the deficit might be in 2009/10. I say £100bn, but it might be £110bn or £90bn. If it were £110bn automatically, would that be "fiscally irresponsible" and therefore trigger tax rises? If, in a few weeks time, some new forecasts come in and the 2009/10 deficit is expected to be £130bn will we suddenly favour £30bn in tax rises, because although it would be the Right Thing to Do in a Recession to allow the deficit to reach £100bn, to allow any more than that would be fiscally irresponsible?
Let's assume not. In that case, it wouldn't be irresponsible to have an additional £30bn of debt if borrowing is going to be £100bn. So if someone has an argument that adding £30bn to debt might help the economy, shouldn't they get a hearing, rather than being shooed away with "Can't do that. The Cupboard is Bare. There...Is...No...More...Money."? Indeed, perhaps with an additional £30bn of debt now we might have less debt in the future. The policy might be "self-funding". (Do I hearing "uncovenanted bonuses"? But I thought we believed in "self-funding" policies now?)
Are we thinking that Sterling's fall is something to do with the chat about fiscal stimulus over the past few weeks? Nothing to do with the expectation that UK interest rates are about to drop like a stone, then? Nothing to do with the sense that UK growth might not be any better than US growth, and hence that investment opportunities in the US weren't relatively as bad as feared? Nothing to do with the thought that, following an Obama victory, the fiscal stimulus in the US might be agreed earlier and be rather larger than previously expected? Nothing to do with concerns over the UK government's ability to meet the liabilities of the nationalised banks (us having supported - indeed proposed - their nationalisation "recapitalisation")?
Never mind. Let's assume it was to do with the proposed build-up in UK debt. Then surely we ought to be proposing an austerity programme? If we really believe (as I do not) that financial markets are on the point of giving up funding UK government debt, such that a mere (and in this context it would be "mere") £30bn in additional debt would threaten the UK government's ability to raise debt, then we should be proposing cuts in government expenditure and rises in tax (after all, uncertainties related to the recession could easily add £30bn to government debt randomly, and on this argument if they did so then we wouldn't be able to borrow the money!). If we believe that, then we believe that the UK is in terrible danger of sovereign default (the danger of our sovereign default, on this story, causing our currency to lose 30% of its value!). OK. There's a view there. An Austerity Programme isn't completely obviously a bad idea. It would probably mean that we have the worst recession since the 1920s - perhaps losing as much as 10% of GDP. But a sovereign default by the UK could result in a much worse GDP loss than that. So if you think things are really that serious (which I don't), then accept the policy consequence! No time for messing about. Let's see the colour of your tax rises!
I don't, for a moment, believe that our Front Bench really buys the horror story above. I don't, for a moment, believe that they really think we are on the point of being unable to fund additional government debt. What I believe they think is not that raising additional debt, at this stage, would be "irresponsible" or "impossible to fund", but that it would be A Bad Idea.
Fine. There's a perfectly good argument that we are not in a situation in which active fiscal stimulus would achieve anything. That would be the claim that there is no impairment of the functioning of lending markets or that any such impairment is currently irrelevant - that no private agent who wants to borrow and for whom it would be actually efficient if he borrowed is currently unable to borrow - and hence that every £1 of tax cut will be matched by £1 extra savings to pay future taxes. There is also an argument that, even if fiscal stimulus might achieve something, the UK economy does not need a fiscal stimulus at this stage - that would be the claim that interest rate cuts are going to do all the work of macroeconomic management necessary, and there's nothing else for fiscal policy to do.
Finally, there is an argument that says fiscal stimulus through tax cuts might be useful later, but that we might as well see how interest rate cuts do before we leap to cutting taxes. This is what I actually think they believe. It's not a stupid position by any means. It's a very plausible one. But it isn't the position they are arguing, and the problem with the position they are arguing is that, later, when they do want to urge tax cuts, how are they going to respond to the jibe that their proposals are "fiscally irresponsible"??
Overlaid on all this, there is another debate. That is the debate as to whether some public expenditure (or future planned expenditure) is inefficient and should be removed. I believe that much is inefficient and should be removed. But we should be removing inefficient public expenditure whether or not we are in recession. If we can find expenditure to cut, then I'm all for that. But that isn't a fiscal policy or any particular response to recession. If we should be providing £30bn in fiscal stimulus, and can find £20bn in cuts in public expenditure (I don't doubt that the latter figure is possible over the longer term, but I do doubt whether it can be done tomorrow - but it is a number that others have mentioned so let's go with it), then taxes should come down £50bn. Public expenditure cut-funded tax cuts are a "both and" policy. My arguments for fiscal stimulus tax cuts are nothing to do with the public expenditure control debate - though that is a very important one.
So, if our Front Bench can find £2.6bn in public expenditure reductions, then great! That means we should cut taxes by £32.6bn. I don't believe there's a good reason to think that that would cause further depreciation of the pound, but if it did, then all the more reason to do it! We need whatever monetary loosening we can achieve now (depreciation in the pound is a form of monetary loosening) to fight deflation. And tomorrow we are probably going to have to cut taxes further to fight deflation, even less "funded" because they will be paid for with newly printed money. Doubtless my suggesting this is even more fiscally irresponsible. That's the way it goes.
