Although the “Deficit Deniers” on the Labour benches like to accuse our government of making cuts in public spending for ideological purposes, the main reason given by the Treasury team for tackling Labour’s budget deficit sooner and harder was to restore our international economic credibility and keep long term interest rates lower for longer.
Has it happened? In my last posting on June 19th I noted that 10 year interest rates had already fallen 0.4 per cent since the election and forecast that they would fall further, as investors digested the Emergency Budget and saw the strength of George Osborne’s commitment to tackling runaway public spending.
I was right. The yield on the 10 year Gilt has fallen another 57 basis points meaning that the total yield demanded by bond investors has fallen by over 20 per cent since just before the election. Underlying this is a general easing in risk premia in many developed economies, but a very specific reduction in the political and fiscal risk associated with the UK economy – as another piece of data, the credit default swap rate, shows very well. This is the market’s assessment of how likely it is that the UK government will default on its debt – and that risk has dropped by over a third since the election.
Of course, the whole point of the fiscal rebalancing is not just to reassure the international bond market (although it is very satisfying to be part of a government that is restoring Britain’s reputation as a safe haven for investors). Rather, the rebalancing aims to deliver low and stable interest rates to underpin the much-needed resurgence in private sector investment, activity and employment.
It is early days and we won’t see much evidence of this until later this year, but for now the main economic argument for tackling the deficit sooner – so that long-term interest rates would remain low – is being unequivocally supported by the evidence.
( 11 comments ) Tags: budget, Deficit, gilt, interest rates, market
Comment by Braveheart on August 24, 2010 at 1:03 pm
“Although the “Deficit Deniers” on the Labour benches like to accuse our government of making cuts in public spending for ideological purposes, the main reason given by the Treasury team for tackling Labour’s budget deficit sooner and harder was to restore our international economic credibility and keep long term interest rates lower for longer.”
Can anyone see the contradiction in this paragraph?
Comment by Braveheart on August 24, 2010 at 1:58 pm
No?
Here’s a clue…
“….“Deficit Deniers” on the Labour benches……. the main reason given by the Treasury team for tackling Labour’s budget deficit sooner and harder….”
Get it now?
Comment by Malcolm Christie on August 24, 2010 at 4:54 pm
To be honest Braveheart no.
The Labour party created the deficit, but the “Deficit Deniers” say it wasn’t them as well as saying Osborne’s cuts are for ideological purposes. “The Treasury team” is the coalition team not the labour lot. (I admit that could be phrased better)
Comment by Richard Mitton on August 25, 2010 at 11:29 am
Stop exporting our money and sovereignty to the corrupt eu. It’s all pointless otherwise. Your leader is making recovery so much more difficult than it needs to be because of his obstinacy on this crucial issue. Like there was with the election, there is a quiet revolution going on and if he dosen’t address the eu situation, it will blow back even worse in the Conservitives faces at the next election and you and he will have nobody to blame except yoursleves. sweep it under the carpet as much as you like, but this issue IS NOT going to go away. The more th public here about what the eu is upto and doing the more people are waking up to the insidious nature of this dinosaur. Or maybe you are all waiting for it to implode…..
Comment by Philip James on August 25, 2010 at 11:33 am
Keep cutting, don’t even flinch just stay on the program within the budget and the truth with shine through. Just because some lefty got into the IFS who cares, labour are wrong in every way and if it meant sacrificing Britain’s economy just so they can get power they would do it.
Ignore the stupid deficit deniers of labour, they have no resume to give sound economic advice.
Comment by Gaile Griffin Peers on August 25, 2010 at 11:52 am
I agree with Malcolm, sorry Braveheart – there is no contradiction – and as an expat voter, despite the pinch as Britain tightens its belt – which we are definitely feeling here – it is a relief to be able to see, from the outside, that the UK appears to be in strong hands. It was appaling to watch the UK drift for 13 years from one disaster to another with a government more interested in popularity polls and US goodwill than in its own people… ..and what they needed… and worse – a government that did what the newspapers, sky news and minor celebs told them to do…
So real information, facts and figures, cuts and budgeting – all the meat and drink of a strong economy – and a strengthening £1 – WHAT A RELIEF !
Comment by Nicholas Heath on August 25, 2010 at 12:34 pm
@ Braveheart
Since your comment was the first reply here, I felt it necessary to correct a fundamental error in your argument.
There is no contradiction inherent in Mrs Perry’s words. The respective explanations for Mr Osbourne’s budget cuts are examples of contra “against”, diction “speech”. Opposition bench rhetoric is contradictory, but does not qualify as a falsification of Mrs Perry’s statements or of Mr Osbourne’ budget proposals.
Had the ideology, or principal of responsible lending and responsible spending been in place during the last government, we would have been in a much better position to endure a global recession.
However, the budget is not based upon this ideology, but is the result of a low risk economic strategy to wean the state off spending proposals which it can not afford. This is known as ‘balancing the books’. In terms of family spending, this is akin to suffering the disapproval of your children when you stop taking out bank loans to buy their affections with toys every week.
Finally, it is interesting how you utilised unsubstantiated Labour ‘ideology’ propaganda to make your point, rather than a viable economic rebuttal of Harvard MBA, Mrs Perry’s comments.
Regards,
Nick
Comment by Anthony Lamb on August 25, 2010 at 1:46 pm
I would like to govt to impress on the general public in terms of what the public can visualise. Dont talk about the Billions in debt, because they/we can not imagine this figure but tlak in terms of weekly or monthly salary ie. if you had a salary of £1,500 net income and you spent £1,850 what is going to be the impact of your life style and so it is with the money situation caused by the Labour leadership.
Hopefully even the staunched Labourites might even get the picture of reality facing us today……..
Comment by Pete B on August 25, 2010 at 3:51 pm
If the cuts are because of the deficit, they will be removed once the deficit has been reduced. If the cuts are for ideological purposes they wil stay even after the deficit has gone. Yes?
Simply confirming that cuts will be reversed once the problem of the deficit has been solved would counter the charge of ideologically driven policy *and* ofer some hope to the British people who will be suffering whilst the cuts are in place.
Comment by Ben Woodward on August 26, 2010 at 10:48 am
I believe that Labour, through their over spending and as a consequence over borrowing have created the deficit. They have the audacity to criticise the government’s actions, casting them off as ideology when they created this mess and have offered no apology for it. They would still have the government do nothing. This Labour government has ended in the same way that they ended in 1979, with deficit and union unrest.
However, the crucial element of Clair’s argument here is the need for private sector investment. Credit to support business expansion needs to improve. The Private sector is the only one that makes money, I would like to hear more about how the government is planning to incentivise people to set up businesses, and therefore create more jobs. Under Labour there was too much waste in all areas of the public sector. Through corporation tax and the proposed jobs tax and they discouraged people from setting up businesses, creating work and money.
Comment by thomasw on August 28, 2010 at 10:42 am
britain put in its worst financial debt ever by new labour they have been borrowing billions for years,and what brought all this borrowing to ahead was the worlds financial crisis,and it stopped new labour from borrowing money,now the coalition have to pick up the bits and put them back together again,and its no joke when you have these con artist labour politicians trying to blame the coalition party for britains financial problems,it makes me think that new labour did not want to carry on running britain or they would have joined up with the lib dems,the lib dems favoured new labour before the tories,new labour hope that they will create such a bad name for the tories and the lib dems by the time the next election comes around in 2015,they will win that election,and then they will carry on borrowing again and fooling the nation.