23 March 2011

Feint Praise

Gavin Davies has a strange piece in today's FT; he rejects all George Osborne's argument for austerity but urges him to stick with Plan A.

Mr Osborne likes to claim (falsely) that Britain had a fiscal crisis or was on the brink of a crisis like Greece or Ireland and so his cuts were unavoidable.
Gavin owns up that this is nonsense:
Admittedly, the public debt ratio is lower than in other economies, and a large proportion of UK debt is funded on a long-term basis. There has also been no sign whatsoever of any funding problems in the gilts market.
So, this is austerity of choice not necessity:
The new government chose to reduce the risks of a sovereign debt crisis at the expense of taking somewhat greater risks with near term economic growth.
Mr Davies thinks that the rationale is wrong but the policy correct. He does argue that the deficits was high and that it could not go on at 11% of GDP for long. Who disagrees with that?
There is a but: stick with Plan A but if the economy dips be ready with Plan B and the bank needs to keep interest rates down.
It is absurd to argue that fiscal policy tightening of 2 per cent of GDP will not depress economic growth. Of course it will, and the Bank should be extremely wary of adding to this tightening by raising interest rates.
Could it be that the praise for George is just a feint?

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