I remember writing in the 1970s about the possibility of a gilt edged strike: the risk that the markets would refuse to buy government debt or at least in the quantities that was needed. Now that is back as a real risk given the huge amounts of government debt that have to be serviced. Even a small increase in the cost of government debt would have a big impact on the deficit.
However, if one started to cut two deeply and too quickly, one might produce a 'W' shaped recession. No great surprise then that economists (once again) are divided down the middle about what should be done: The economy
I tend the share the view of the CBI's chief economist: it is not the starting point that matters so much as the medium-term credibility of the plan.
This article also argues that what Britain needs is not shock therapy but a credible five year plan: Therapy
The risk is that a new Conservative Government would seek to hit the ground running by making deep cuts; the resultant rise in unemployment would hit the recovery; and the Government would become unpopular on two fronts - reduced public services and poor economic performance. Some of this could no doubt be blamed on Labour, but that alibi would wear thin after a while.
Realistically, the Conservatives expect to be unpopular and feel that they can ride out the storm until the sunlit uplands are reached. Maybe, but it will require good timing and great political skill.
3 comments:
While a similar situation is occuring in the US (except China is buying the US debt) is there a danger of the recession biting back if China no longer funds the debt?
Is there a chance that China will switch from dollars to euros/sterling?
Finally, has there been any noticeble evidence of the crowding out effect?
Good timing and great political skill from the politicians we have to choose between? Sounds like a W-shaped recession looming to me - Dave.
In response to anonymous, it would be a serious situation if China stopped funding the debt but (a) they have to do something with their foreign exchange holdings and (b) the success of their economy is highly reliant on the continued success of the US economy. The dollar remains the dominant reserve currency, there has been little switch into euros other than in countries that are on the edge of Europe and have most of their trade with Europe. Sometimes reserves are held in Swiss francs or in gold (especially by India). I have not seen any studies which suggest crowding out because interest rates are very low and private sector demand for investment funds is below par. It could happen in a recovery phase.
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