Radio 5 booked me yesterday to talk about the G-20 summit this morning. A 7.05 slot wasn't ideal, as we went to the theatre in London last night to see The Tragedy of Thomas Hobbes (which I would recommend). However, by the time I got in the cab at 6.30 the producer was on the phone: the main story was now George Osborne's 'scorched earth' remarks.
Leaving aside the partisan political rhetoric, what sort of case does Osborne has? There is no doubt that the pound has fallen heavily against the pound and the euro and I would expect it to fall further. I don't know where it will bottom out but hopefully before we have parity with the dollar and the euro. My guess would be $1.20.
Potentially this fall has inflationary implications and would thus constrain the scope for further interest rate cuts. However, it will be some time before there is an inflationary effect and in the meantime there will be scope for selling more British exports. Of course, it's going to cost a lot more to go on holiday abroad and I think that voters are quite sensitive to that.
George Osborne wants monetary policy instruments to do the heavy lifting, but my view is that one needs a two club policy and a fiscal stimulus is important. The key on a global level is further action by China and the United States.
He is also being a bit disingenous when he says that the problem is government debt. Of course, the Government has been guilty of fiscal laxity. However, as the IMF made clear the greater part of the problem in the UK has been personal indebtedness. People in Britain have been living beyond their means - but paradoxically they have to carry on doing so to maintain the economy.
I can see why George Osborne is upset because the Conservatives have beeen handed a poisoned chalice should they come into office. However, he has laid himself open to charges of talking down the currency. Labour has also repeated the 'novice' charge, but this will wear thin if it is overused.
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I am not too worried about the fall in the pound (as long, of course, as there isn't a total collapse). This along with cuts in interest rates should help the economy (although I am aware of Kenyes comment that cutting interest rates can sometimes be like 'pushing on a piece of string'). I am less convinced about a fiscal stimulus, especially given levels of government borrowing and debt (higher than the government claims if you add in Northern Rock etc). Arguably, however, there are merits in tax redistribution as those on lower earnings are more likely to spend 'tax cuts' than those who are better off. I don't think whether people can afford to go on foreign holidays should be influencing economic policy during these hard economic times but it would, of course, make sense to delay any increased taxes on aviation. These could only really be introduced when living standards are increasing.
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