The Treasury, we’re told, is planning to relax its fiscal rules. Let’s be clear. This is not an issue of economics, but of moral philosophy.
It’s not an economic issue because the market in government bonds is a global one, and UK national debt is such a small fraction of global debt that it has a negligible effect upon bond prices. If UK debt were to rise by five per cent of GDP - £70bn - this would be less than 1% of OECD central government debt.
If you’re looking for things that could raise gilt yields, worry instead that a possible nationalization of Fannie Mae and Freddie Mac’s debt would take the US’s debt-GDP ratio to Italian levels. Or worry that a revaluation of Gulf economy currencies could bring an end to Bretton Woods II and reduce the buying of US Treasuries that has held global yields down.
Compared to these dangers, a relaxation of the UK’s fiscal rules is insignificant.
Nor is it, properly speaking, a political issue. Governments - especially in small open economies - have less control over their borrowing than they pretend. This is because government borrowing is, by identity, the counterpart of private saving; the government is borrowing a lot because companies and overseas residents (mostly in Asia) are saving so much.
I don’t therefore, regard higher borrowing as a sign of New Labour’s imprudence. When the Tories say this “puts the final nail in the coffin of Gordon Brown's reputation for economic competence” they are just engaging in a managerialist folie a deux in which both parties pretend government finances can be controllable.
Not, of course, that Brown has any cause to complain about this. If you take credit for the rain, you mustn’t be surprised when you get blamed for the drought.
Instead, all this matters because government debt is deferred taxation. Now, if we lived in a world of Ricardian equivalence, this would be a problem for the private sector today, as people saved in anticipation of higher future taxes. But given the strength of consumer spending in recent years in the face of rising government debt, this doesn’t seem an issue.
Which is why I say this is a moral question. The government is imposing a burden upon future generations. Granted, it’s a small burden; the interest cost of debt of 5% of GDP is only around 0.2% of GDP a year. But do we have any right at all to impose this upon the unborn? I’ve no answer, but here’s a discussion.
It’s not an economic issue because the market in government bonds is a global one, and UK national debt is such a small fraction of global debt that it has a negligible effect upon bond prices. If UK debt were to rise by five per cent of GDP - £70bn - this would be less than 1% of OECD central government debt.
If you’re looking for things that could raise gilt yields, worry instead that a possible nationalization of Fannie Mae and Freddie Mac’s debt would take the US’s debt-GDP ratio to Italian levels. Or worry that a revaluation of Gulf economy currencies could bring an end to Bretton Woods II and reduce the buying of US Treasuries that has held global yields down.
Compared to these dangers, a relaxation of the UK’s fiscal rules is insignificant.
Nor is it, properly speaking, a political issue. Governments - especially in small open economies - have less control over their borrowing than they pretend. This is because government borrowing is, by identity, the counterpart of private saving; the government is borrowing a lot because companies and overseas residents (mostly in Asia) are saving so much.
I don’t therefore, regard higher borrowing as a sign of New Labour’s imprudence. When the Tories say this “puts the final nail in the coffin of Gordon Brown's reputation for economic competence” they are just engaging in a managerialist folie a deux in which both parties pretend government finances can be controllable.
Not, of course, that Brown has any cause to complain about this. If you take credit for the rain, you mustn’t be surprised when you get blamed for the drought.
Instead, all this matters because government debt is deferred taxation. Now, if we lived in a world of Ricardian equivalence, this would be a problem for the private sector today, as people saved in anticipation of higher future taxes. But given the strength of consumer spending in recent years in the face of rising government debt, this doesn’t seem an issue.
Which is why I say this is a moral question. The government is imposing a burden upon future generations. Granted, it’s a small burden; the interest cost of debt of 5% of GDP is only around 0.2% of GDP a year. But do we have any right at all to impose this upon the unborn? I’ve no answer, but here’s a discussion.
"This is because government borrowing is, by identity, the counterpart of private saving; the government is borrowing a lot because companies and overseas residents (mostly in Asia) are saving so much."
This is only true on a trivial level. Total world government borrowing must equal world government saving: the UK can choose it's own level of borrowing. Although the government finances are not precisely controllabale through the levers of tax and spending most governments have a reasonable level of control.
Posted by: Sam | July 18, 2008 at 09:58 AM
"But do we have any right at all to impose this upon the unborn?"
You mean DOES BROWN have any right to impose this... And the answer is NO. Obviously not. An unelected coward has no right to do this merely to try to fuck the incoming Tory government, which is the underlying reason for this, nothing else. Brown KNOWS he's fucked and he's trying to take the rest of us with him.
I hope all right thinking people will be around Parliament on Nov 5th this year for a nice stroll...
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Posted by: www.paintingsbymike.com | July 18, 2008 at 12:40 PM
Politics thank goodness is a branch of philosophy, not the other way round, show biz for ugly people and boy these guys are ugly.
Posted by: passer by | July 18, 2008 at 06:17 PM
But do we have any right at all to impose this upon the unborn?
We may or may not but it's the best short term strategy for short termists, whom I think constitute the majority?
Posted by: jameshigham | July 19, 2008 at 09:33 AM
Life is short term is it not?
Posted by: passer by | July 19, 2008 at 01:35 PM
"We" are not deciding to do anything. Brown is deciding to tax us after the next election, because most people will not know about those taxes until after the election, when it will be too late to change their votes.
Posted by: ad | July 19, 2008 at 04:10 PM