What reckless borrowing does to sterling

Conservative Party researchers have compiled the following selection of quotations from eminent economists and commentators to back up George Osborne's remarks at the weekend...

HM Treasury
“Loosening fiscal policy when the underlying structural fiscal position was poor could damage consumer and business confidence, thus having the opposite effect to that intended.” (HM Treasury, Analyzing Fiscal Policy, 1999)

Charlie Bean, Deputy Governor of the Bank of England
“If you have a Fiscal Policy action which is expected to be relatively long lasting, it’s not clear how fiscal plans are going to be brought into a sustainable pattern further down the road, that's likely potentially to lead to concerns that eventually it might get monetised, that might put downward pressure on sterling – on the exchange rate. I mean this is something you've seen in emerging market countries in the past.” (Charlie Bean, Chief Economist at the Bank of England, Inflation Report Press Conference, 12 November 2008)

Michael Saunders, Chief Economist at Citibank
“In practice, in seeking to both stimulate the economy and raise its own popularity in the runup to the next election, the Government would prefer any fiscal stimulus to be large and appear to be permanent, and will aim to downplay the extent to which any fiscal loosening is temporary.” (Citi – BoE Inflation Report and Labour Market Data, 12 November 2008)

Daragh Maher, senior currency strategist at investment firm Calyon
"Like everywhere, the UK economy is slowing down. But the perception is that we have over-borrowed more than other countries, so the payback will be greater." (BBC News Online, 13 November 2008)

Willem Buiter, Professor at the London School of Economics, former member of the MPC
“If it becomes a rout, as it I think now it has a risk of becoming because people have lost confidence in the ability of the British government to finance its expenditure in a sensible coherent way over time, then it could lead to the destruction of asset values across the country and a financial crisis rather than an old-fashioned, nice Keynesian demand stimulus.” (Today Programme, 14 November 2008)

Tim Besley, member of the MPC
“One of the factors behind the fall in the pound is surely the fact that foreign investors are now demanding a higher risk premium to hold U.K. assets… Sterling weakness will also lead to a further squeeze in real living standards as UK consumers will, in the end, have to pay more for imported goods… At the present time, movements in Sterling appear likely to remain more influenced by an assessment of general economic prospects in the UK and the risk premium that investors are demanding to hold Sterling assets, rather than with the level of Bank Rate.” (Speech by Tim Besley, member of the MPC, 28 October 2008)

IMF
“Fiscal deficits have been associated with a depreciating exchange rate. This may be explained by expansionary fiscal policies raising perceived exchange rate and political risks and lowering the credibility of both monetary and fiscal policies. Over the long run, a sustained improvement in the fiscal balance that raises national saving and reduces the ratio of government debt to GDP will very likely lead to a real exchange rate appreciation. Thus, a country that saves more than its trading partners will ultimately find that its currency will strengthen relative to other currencies.” (IMF, Pamphlet Series No.49, Guidelines for Fiscal Adjustment)

Nigel Lawson, former Chancellor of the Exchequer
“I am not persuaded, however, that an attempted fiscal stimulus is desirable. Of course the budget deficit will rise as the recession erodes tax revenues and increases benefit payments, and that is no problem. But in the UK in particular, where, under this Government, the underlying fiscal position has deteriorated alarmingly, discretionary action to cause it to deteriorate still further would, in my judgment, be unwise.” (Lords Hansard, 3 November 2008)

Terry Burns, former Permanent Secretary to the Treasury
“I belong to the same group as many noble Lords who have spoken today who say that to go beyond that would be very dangerous at this point. We begin from a position of a structural budget deficit. Adding to that structural budget deficit can only increase the problems subsequently.” (Lords Hansard, 3 November 2008)

Trevor Williams, Corporate Market Chief Economist, Lloyds TSB
“it could mean higher long term interest rates and so weaker economic growth than otherwise and a weaker exchange rate, implying higher than otherwise inflation and higher short term interest rates… the rate at which the outstanding debt position deteriorates will depend on just how bad the budget deficit is from year to year. The challenge will be to prevent it from deteriorating too rapidly and potentially destabilise the UK economy” (Lloyds TSB, Corporate Markets analysis, 28 July 2008)

Comments

[FactChequer]

Gordon Brown, 19 March 2008

"Unfunded promises are empty and hollow promises to the people of this country".

Gordon Brown, 4 July 2007

"I also have to make the point to him that the unfunded change is no change at all".

Gordon Brown, 26 October 2006

"What we will not do is put stability at risk by irresponsible, unfunded and reckless tax cuts".

[Andrew Lilico]

The HM Treasury, Buiter, and perhaps the Calyon quotes offer prima facie support. The Saunders, Lawson, Burns and Williams quotes have nothing to do with the currency. The Bean, Besley and IMF quotes appear to accept fiscal stimulus if it is associated with a plan for returning the fiscal position to balance over the medium term.

Two and a half out of ten might be better than nil out of ten, I suppose, though of course one could also say that out of ten quotes they picked, two and a half favoured their position (and one of those two and a half is the Treasury itself!) whilst three were against them...

[Sean]

“it could mean higher long term interest rates and so weaker economic growth than otherwise and a weaker exchange rate" Trevor Williams.

Nothing to do with the currency?

[resident leftie]

No one is in favour of reckless borrowing, least of all Gordon Brown. Our current levels of debt are low compared with many developed economies, and certainly lower than when the Tories were last in power. Your own Andrew Lilico is arguing passionately in favour of fiscal stimulus, as is the head of the IMF. Note that careful use of the word "perception" in Maher's quote. Like Keynes, we change our minds when circumstances change (though not spin round helplessly in the wind like Osborne)

Some other selective quotes, some from the same people:

Global or local?

“This is a once-in-a-liftime crisis and possibly the largest financial crisis of its kind in human history,” says Charlie Bean, the Deputy Governor of the Bank of England

The strength of the pound?

Its decline may ``help to pull the economy out of its slow period,'' the bank's Chief Economist Charles Bean said.

All of them [the MPC] welcomed the recent currency plunge, saying it should help the UK shift towards exportled growth, and away from consumer spending.

"Mr Maher says that the pound at $2 was significantly overvalued and puts the currency's long-term intrinsic value at around $1.60."
[It was $1.40 after Black Wednesday]

"A weaker pound ... will be great news for UK exporters — and a welcome boost to economic growth."

Coordinated action?
Dominique Strauss-Kahn (IMF G20 press conference)
"Inflation is on average close to zero in the world today. There is some explaining that we may have a risk of deflation. So there's no risk to use the fiscal policy. If there has ever been a time in modern economic history when fiscal policy and a fiscal stimulus should be used, it's now."

"What we need is more than 1 percent, we certainly need at least 2 percent, and some of the heads of government were arguing even that we need more than 2 percent. But you know in the IMF we're very conservative so 2 percent seems to me the right target. What we're trying to organize is this coordinated action plan to have a boost in growth starting from a [global] fiscal stimulus of 2 percent [of world GDP]. Some measures have already been taken by some countries, and we are looking for a result of an increase in growth of also 2 percent."

Bad or good idea?
``It is a clever way of trying to constrain the scale of fiscal easing,'' said Michael Saunders, an economist at Citigroup Inc.

Andreas Prindl, former Chairman of the Nomura Bank:
"For the moment I’m not worried about 40% of our GDP being government debt. I’d say, so what? The European average is 80%… we’re way below that…we’ve lots of room to stimulate to borrow and without any serious worry yet."

[Andrew Lilico]

Sean - you're quite right. Let's put the score at three and a half out of ten.

[GB£.com - a RON (Replace Osborne Now) not a Roon]

Andrew, to be fair to CCHQ, I think its the ConHome title itself that causes the confusion as the conservatives.com site uses the title "Reckless borrowing is road to economic ruin.", no mention of currency.

Some clarification from the ConHome team as I can't believe that even CCHQ would be that incompetent.

[Malcolm Dunn]

'Our current levels of debt are low compared to many developed economies'-Resident Leftie.Of course that's not true at all.What lying Labour politicians can get away with in interviews is unlikely to be accepted by anyone here.

[SW]

residentleftie: 'No one is in favour of reckless borrowing, least of all Gordon Brown.'

Have you some sort of direct line to the great leader's (flawed) conscience?

[ChrisD]

Ed Howker on the Open House Blog.
Trouble ahead
"You know when you get that pit of your stomach foreboding? The kind you get when someone tells you that Liam Byrne is presenting the prizes at the Village Fete and you've got to organise the rider? I've got that. It just occurs to me that maybe the Government's strategy for working us out of recession is actually, ahem, total rubbish. Here's is my, admittedly bleary-eyed, non-LSE trained thinking.

1. By extending public borrowing (as Darling will almost certainly do in the Pre-Budget Report), the British government will gobble up all of the cheap borrowing (by which I mean the money from funds prepared to lend to the UK at the most competitive rates). And that means that the private sector (engine of the economy and the only people who can dig Britain out of a slump) will not get it - which is bad.

2. Tax cuts or public spending increases are meant to encourage people to spend, but the root of the crisis is that people are over-extended and will be forced to service debt - so it probably won't work.

3. Much of the UK economy is hedged around property prices (already falling) through mortgages and secured debt. When these debts can no longer be serviced repossessions will explode (they have already risen dramatically) leading to a fire sale of housing stock as lenders try to get their cash back - this in turn will lead to even more rapidly falling house prices. Cue: catastrophic depression.

Have a nice day..."

And when I see Donal Blaney asking Are tax cuts the answer?
I know, I had to lift my jaw of the ground too! Now I really am worried!

[pp]

Lefty - I think you should note that even the bbc are now qualifying the 'uk has low borrwing' line with a reference to it not including PFI etc...

I guess this is since Brown admitted it http://www.bbc.co.uk/blogs/nickrobinson/2008/11/stimulating_the_global_economy.html (para 3) - now the organ-grinder has fessed up, his monkeys are dropping the pretence.

[pp]

ps. and para 7 here

http://www.bbc.co.uk/blogs/thereporters/robertpeston/

I'd like to see osborne announce a tory commitment to end the tv tax - I don't want to be forced to pay the wages of the dire employees of that dreadful organisation.

[michel imperi]

'Our current levels of debt are low compared to many developed economies' Even if that were to be true , what the markets are discounting is our future borrowing requirements . Because we have had a much larger budget deficit in the current year than any other country apart from Egypt and Pakistan the market has been discounting it for at least the last 6 months ( cue CDS spread widening between UK and Core Euro countries ) , if they perceive that even more borrowing will be required ,they will punish the UK further by selling off more Gilts and depressing the pound further.

[resident leftie]

Posted by: pp | November 17, 2008 at 15:12
Lefty - I think you should note that even the bbc are now qualifying the 'uk has low borrwing' line with a reference to it not including PFI etc.

I am unhappy that the treasure has attempted to keep PFI off the books for years, which is why I rely on the Eurostat figures. PFI was introduced under the Tories, and followed slavishly by Brown. I think it has been a waste of money, and that the state would be better off owning buildings, and not leasing them back at extortionate amounts from the private sector.

This doesn't stop debt being lower than it was under the Tories in 1997, when, I believe, there wasn't a world recession.

[David Sergeant]

Just to note that Central Office have produced and publicised the work. This is a great improvement from the old days when only party spokesmen were allowed to make comments with, hence, few appropriate comments being made.

Andrew, I have to say you are really stretching logic to come up with only 3 and half out of ten although I see you carefully insert "appear" re Bean, Besley and IMF!

[Winston C]

The point that resident leftie seems unable to grasp is that the world economy has been through a sustained period of growth.But where is the dynamism and growth in our economy? What have this Government done with all those tax revenue?Have they restructured and improved Health and education for example, so that, they are run for the consumer good rather than those who work within them.

Have our police become better empowered to drive down violent crime? What bang has Gordon delievered for our buck? quango's profilerate nobody is held accountable and worst of all Brown masquarades as some sort of economic genius.

The simple truths of British politics are now reasserting themselves.Labour Government is expensive irresponsible government in both the economic and social sphere.The Conservative is now and will always be the party of sound money and less waste.

[David Belchamber]

Leftie:

"Andreas Prindl, former Chairman of the Nomura Bank:
"For the moment I’m not worried about 40% of our GDP being government debt. I’d say, so what? The European average is 80%… we’re way below that…we’ve lots of room to stimulate to borrow and without any serious worry yet."

As always when dealing with Gordon Brown, you have to find out first what the real figures are. Leftie accepts that PFIs (c£100Bn?) should be added; what else? John Major in the Times this week suggested: unfunded public sector pension liabilities, debts of Network Rail and Bradford and Bingley. He reckons that all together the figure works out at about £76,000 for every household.

Bremner, Bird and Fortune yesterday had other items to add such as Northern Rock and recapitalising the banks. Bremner produce a chart that David Cameron should display at PMQs which showed the huge disparity between Brown's highly selective figure and one that actually includes things that the taxpayer is going to be called upon to pay at a later stage (i.e. after the election), excluding whatever extra Brown adds in a week's time.

I really do think that the conservatives must make this absolutely clear to the public now and not let Brown get away with his "dodgy facts" yet again.

[David Belchamber]

Leftie:

"Andreas Prindl, former Chairman of the Nomura Bank:
"For the moment I’m not worried about 40% of our GDP being government debt. I’d say, so what? The European average is 80%… we’re way below that…we’ve lots of room to stimulate to borrow and without any serious worry yet."

As always when dealing with Gordon Brown, you have to find out first what the real figures are. Leftie accepts that PFIs (c£100Bn?) should be added; what else? John Major in the Times this week suggested: unfunded public sector pension liabilities, debts of Network Rail and Bradford and Bingley. He reckons that all together the figure works out at about £76,000 for every household.

Bremner, Bird and Fortune yesterday had other items to add such as Northern Rock and recapitalising the banks. Bremner produce a chart that David Cameron should display at PMQs which showed the huge disparity between Brown's highly selective figure and one that actually includes things that the taxpayer is going to be called upon to pay at a later stage (i.e. after the election), excluding whatever extra Brown adds in a week's time.

I really do think that the conservatives must make this absolutely clear to the public now and not let Brown get away with his "dodgy facts" yet again.

[Louise]

So, OK, there's a problem, how do we fix it? is going to be what people ask us. Full marks for CCHQ - although Andrew knows what he's talking about - on that score, but 0 on the "What we would do to control borrowing in the long term besides some spiffy little ideas George came up with last night" category.

D Belchamber - do you think he would do so, or do you think he would open on another thing neither we nor the government can't do anything about, such as the latest child to be murdered by its own parents?

For all what we pointed out over the weekend, we still have no ideas what exactly to do about it or what they would implement instead. The old "cut waste" canard which lost us the last election and quite probably the one before is being rolled out yet again, as if there was clearly identifiable objectifiable waste to cut (and I'm not talking about identifying the subjective "waste" people would most like to see abolished - I'm no fan of the RDAs myself, but my mother is a local (non-partisan) parish councillor and I don't think she has much of a problem with them).

Sounds like we're desperate rather than coherent. I don't think Cameron is going to be leading on the economy in PMQs for a long time to come.

[the Bishop swine]

Labour forces most people to become mules, half people useful only as factory hands or cannon fodder neither of which we now need. This is a result of both wanting to educate and manipulate simultaneously. "We really must get across reforms that help the small business person get going." as Jim Noone simply explains in his Blog.

How are we going to reverse the dumming down of our people when the need for educated engaged and willing self employed co-operators was never greater. We need a radical change of direction.

Away with dependence, its dependence that must be eradicated ! Of course we will suffer those in need, but the rest must learn how to make their own way. Many more people will have to be encouraged into running their own lives. Rather than 1p tax cuts that fool nobody we need root and branch reform. We need to favour self reliance in our tax system. How many unemployed people could be running their own buying and selling business on Ebay ? Shouldn’t we encourage a nation of online shop keepers. Even if they make only a partial contribution to their up keep, to start with. We should support them at ever opportunity. There is no reason to discourage children who wish to experiment with their own record labels, we should be encouraging such endevours. We should be teaching our children this. Instead we are teaching our children to be good little cogs. Turn up on time ,work hard, don’t think.

Labour dosn't want people to think, instead they care only that they do as they are told.

This recession is the oppertunity we have waited 10 years for.

[The Bishop Swine]

'Our current levels of debt are low compared to many developed economies'

What a cruel lie. We cannot compare our situation to nations like Italy those debts were built up when borrowing was still possible. Brown will find that his credit cards are all maxed out pretty quick. Labour has built a tax system that forced people to borrow just to get by. He can no longer deny that he was in charge when the disaster was allowed, even encouraged to grow. If I (an average Joe) could see the danger why didn’t he?
Our Housing bubble was obscenely greedy our lenders were short sighted, stupid , neglectful and in some cases malicious. All the gross incompetence was going on under the “all knowing, all seeing” eyes of Gordon Brown. Of course he must be blamed.
Brown can no longer Borrow his way out of trouble, but that has not stopped him printing us into a currency hole.

There are a number of ways we could wipe thousands of millions off the cost of government. The most obvious target being the National assemblies. For the most part they are not friends of ours so their loss would be a lot less painful for us and the wicked SNP would at least understand our motives. There is nothing to be gained for Scotland from independence other than poverty and bankruptcies. I would love to see an end to the “jobs for the boys” Mentality of Labour and the Libdem’s.We don’t need millions of talking shops legislating this and that. Legislation is hardly ever the answer to most problems. The Criminal law is badly framed and only randomly applied. What has Labour gained from its awfully drafted and guillotined acts? Its killed off thousands of small public houses, and yet its fostered (pun not intended) a culture of excessive drunkenness. It’s encouraged a fairly large number of older people to quit smoking but encouraged teens to take up the habit at an ever faster rate. Its collected and collated large amounts of sensitive details about people and stored it on data base’s and then it has lost vast amounts of it. It has talked about ending prejudice and hatred, yet it has turned the Muslims against us.

However most damming of all its has lead us into a deep recession and it has lead us there by over taxing and over subsidizing and generally by over spending our, money, robbing our pensions (once the best in Europe), robbing our children and stealing from our grandchildren. Brown must go and soon.