3 October 2012

The UK macroeconomic facts of life

In his Labour Party Conference speech on 2 October, Ed Miliband asked the audience:
Have you ever seen a more incompetent, hopeless, out of touch, u-turning, pledge-breaking, make it up as you go along, back of the envelope, miserable shower than this Prime Minister and this Government?
Good rollicking stuff, to which the cynic can only answer: possibly not, but surely rivalled by the one led by Gordon Brown and in which you were Secretary of State for Energy and Climate Change! In the Daily Telegraph, Allister Heath, the editor of City A.M, provides a more adult perspective on what he calls:
The dirty little secret of contemporary politics is that there is very little difference between what the Coalition and Labour intend to do on macroeconomics. Ed Miliband's policies are little more than Coalition-lite. In an economy worth £1.57 trillion a year, and with the Government spending at least £683bn, of which around £130bn will probably be borrowed, a raging argument over whether £1bn extra should be spent on apprentices or £3bn of 4G money on housing is tantamount to a phoney war over 0.3pc of GDP. Such differences are little more than rounding errors.  
A genuinely game-changing left-wing alternative would need to involve numbers 10 times larger: spending would have to be increased by £45bn to make a real difference. Such a move would be suicidal, so we should count our blessings that Labour are only pretending to reject austerity. But the furiousness of the debate in Westminster is often inversely proportional to the true significance of the issue at hand. Britain's political classes have succumbed to what Sigmund Freud described as the narcissism of small differences. It suits everybody involved to exaggerate differences.
(our awareness of “small differences” possibly having been raised by Grayson Perry)
Heath concludes that
:… a Miliband administration would end up spending roughly the same share of GDP as the current Coalition, and would be forced to stick with austerity.  
… In the absence of dramatic supply-side and tax reforms – which neither Government nor Opposition back – the New Normal over the next few years will be growth of 1pc or so a year, meaning no extra money to spend on Labour's client groups or on public services, robbing the party of its main justification.   
… Labour is in desperate need of fresh thinking. It should ditch its meaningless "predistribution" idea, pseudo-intellectual drivel that could be used to justify anything.
Heath, whose article should be read in full, goes on to suggest some changes, particularly on monetary policy, should Ed Miliband be inclined to take on Ed Balls. He does not address two major problems – the impact on already strained household expenditure of increased mortgage repayments should (when!) interest rates go up, and how much longer lenders will allow the UK to borrow £130bn a year, which is, slightly more tangibly, about £356million every calendar day or £513million every day that the markets are open - about £10 for each adult.

ADDENDUM 17 October

In an article in the Daily Telegraph, Allister Heath has now started to address the point “how much longer lenders will allow the UK to borrow £130bn a year” above:
Since August 1, the Debt Management Office, which is tasked with raising cash for the Treasury, has sold £34.3bn of new IOUs. During the same time, the Bank of England bought £32bn of them. The difference – a relatively trivial £2bn – is the net amount the market had to absorb. There is actually a scarcity of some kinds of gilts. Interest rates on government debt are no longer a meaningful representation of what private lenders are demanding to extend cash to the British state. There is a false market in government bonds.  
… In August, the Bank actually bought more gilts (£14bn) than the Treasury issued (£10.1bn). So far this financial year, the Bank has bought £62.5bn worth of gilts, almost two thirds of the £100bn or so issued. Total gilt purchases by the Bank have reached £365.7bn out of a total gilt market of £1.164 trillion. he state now owes 31pc of the national debt to itself. The official line is that these gilts will eventually be sold back to the private sector, as QE makes way for quantitative tightening (QT), but this is unlikely. Either the gilts owned by the Bank will be held until maturity and then rolled over; or they will eventually be cancelled.  
… Forget about the tough rhetoric: the UK is being kept afloat by a new bubble, albeit one caused by QE rather than house prices. It is only when reality eventually reasserts itself that we will finally understand what fiscal pain really means.
Unfortunately August 1 is about 11 weeks ago, which suggests that the UK is currently borrowing at a rate of over £160bn a year.

No comments:

Post a Comment