Irresponsible or prudent?
- 15 Nov 08, 02:45 PM
WASHINGTON: Labour say he's being irresponsible. The Tories that he's showing the courage to be prudent.
Either way George Osborne must have known he was risking huge controversy by warning of a possible "collapse of sterling" whilst the prime minister is abroad at the Global Economic Summit.
The shadow chancellor's thinking is this. A British fiscal stimulus package will be too small to make any real difference if it's affordable, or unaffordable if it's big enough to make a difference.
Why? Because unlike China or Australia we do not have budget surpluses to spend and unlike Germany our budget deficit is not at a level where it's safe to borrow more. Osborne points to warnings by the Head of the European Central Bank amongst others that only those countries with fiscal room for manoeuvre should go for a stimulus.
What's more he has heard from former chancellors Howe, Lawson, Lamont and Clarke and the former Permanent Secretary of the Treasury, Lord Burns about how they tried in vain to stimulate the economy in the recession of the early 1990s.
What, though, of the backing of the governor of the Bank of England? Osborne points to the two caveats that Mervyn King added - that any stimulus be temporary and be accompanied by government setting out a clear path back to prudent levels of borrowing.
What the shadow chancellor was warning of today was the reaction of the markets if they lose faith in the British government's financial responsibility.
What's his evidence? He points to the 25% drop in the pound against the dollar and the fact that markets are demanding double the risk premium for British government debt as they are now for German government debt.
Politically, Team Brown believe the Tories have made a huge mistake and claim he's talking the economy down as the prime minister's trying to boost it.
In policy terms some are more candid, admitting that they are dealing with a balance of risks and arguing that the risk of doing nothing in the face of a serious recession is greater than the risk of being punished by the markets.
UPDATE: Speaking in the House of Lords earlier this month (3 November 2008) Lord Burns warned of Sterling problems, though in a rather less graphic way than George Osborne.
He said: "Each of the three serious downturns that I have observed at close quarters --1974-75, 1980-81 and 1991-92 -- have had two striking characteristics: namely, the emergence of a budget deficit that increased to a point where the restoration of structural balance was a long and painful process; and at some point a depreciation of Sterling that moved from just about being welcome to becoming very painful. Let us hope that we are not forced to repeat those experiences."
