The Danes' counter-example

Additional stimulus hasn't caused bond yields to rise in Denmark. They're in the EU and have their o

Denmark's new three-party coalition government has announced that the primary aim of its economic policy is to secure a balance between revenues and spending and create growth by bringing forward public investment. The new Danish prime minister, Helle Thorning-Schmidt, who is Neil Kinnock's daughter-in-law, unveiled her coalition cabinet on Monday and indicated that her government would take a radically different approach from the austerity measures being adopted by other European countries. The new Danish government apparently intends to spend ten billion Danish kroner to upgrade roads, railways and bicycle paths. The stimulus agenda also includes plans to provide temporary tax credits for companies that invest in R&D and machineries along with new technologies. It said it also aimed to carry out a tax reform that would significantly reduce taxes on wage incomes.

This is a very interesting counter-example to George Osborne's and David Cameron's claims that austerity is crucial to keep bond yields low. This is what Cameron said in the rapidly revised part of his party conference speech yesterday, that in a draft version that was circulated told people to save -- when he really meant he wanted them to spend.

When you're in a debt crisis, some of the normal things that government can do, to deal with a normal recession, like borrowing to cut taxes or increase spending -- these things won't work because they lead to more debt, which would make the crisis worse. Why? Because it risks higher interest rates, less confidence and the threat of even higher taxes in future. The only way out of a debt crisis is to deal with your debts. That's why households are paying down their credit card and store card bills. It means banks getting their books in order. And it means governments -- all over the world -- cutting spending and living within their means.

Cameron's speech -- even the corrected final version -- gets it precisely the wrong way round. The only way out of a debt crisis -- if by debt crisis we mean, as he says, a situation where households are desperately trying to pay down debt because on an individual level this is rational -- is for the government to step in and spend more, at least temporarily. For the government to join in and try to save more too, which he argues is logical, is disastrous. A first-year undergraduate course in macro-economics should have taught him that!

What has happened in Denmark -- which, just like the UK, is not in the euro but is a member of the European Union? It is a nice test case, because if Dave is right -- which he isn't -- then bond yields should have soared in Denmark, even on talk of injecting stimulus. They haven't. Here is a selection of yields on ten-year government bonds for Denmark and the UK over the past couple of months or so.

 
  Denmark UK
05/10/2011 2.005 2.354
30/09/2011 2.069 2.427
23/09/2011 1.932 2.363
09/09/2011 1.975 2.456
02/09/2011 2.204 2.641
19/08/2011 2.362 2.606
12/08/2011 2.573 2.753

 

One argument the coalition has made is that the US has lower yields because the dollar is a reserve currency, so their data isn't relevant: currently their yield is 1.888 per cent. But that does present the government with a further problem, because bond yields in Sweden, which is also in the EU but not in the euro, are 1.695 per cent. They are 2.135 per cent in Canada, which is also not a reserve currency, and a paltry 0.879 in Switzerland, which really does look like a place of safety.

Based on the evidence from Denmark, putting additional stimulus into the economy has not caused bond yields to rise and they remain below those in the UK. The Danes are a much better comparison country than the Greeks, the Portuguese, the Italians or the Spanish that don't have their own central bank and currency as the Danes do; just as we do.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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6 times government ministers have contradicted each other over Brexit

Getting your line straight is slightly more complex than a moon landing. 

“No deal is better than a bad deal,” Theresa May told Jeremy Paxman during the 2017 general election campaign. Almost exactly two months on, her Chancellor, Philip Hammond, has declared the UK will seek a transitional deal that could last three years.

Hammond’s comments come a day after government ministers contradicted themselves over when free movement could end. “Strong and stable”, the Tory campaign slogan, has gone the way of Labour’s Ed Stone. 

Here’s a selection of times government ministers have contradicted each other over Brexit.

1. Free movement

Brandon Lewis vs Amber Rudd and Michael Gove

The immigration minister Brandon Lewis declared on 27 July that a new immigration system would be in place from the spring of 2019.

But his departmental boss, the home secretary Amber Rudd, said the same day that there would be an “implementation period” while the flow of EU workers continued and there would be no cliff edge.

Meanwhile, environment secretary Michael Gove and non-expert Brexiteer said days earlier that there was likely to be a transitional period where free movement continued for two years.

2. Chlorinated chicken

Michael Gove vs Liam Fox

One question emerging from discussion of a potential UK-US trade deal was whether chlorine-washed chicken would be allowed into British supermarkets. The international trade secretary Liam Fox said such chicken was “perfectly safe”.

He may not have been round to Michael Gove’s recently for dinner, then. The environment secretary said he opposed the import of chlorine-washed chicken and that “we are not going to dilute our high food-safety standards” in pursuit of “any trade deal”. 

3. Moon landings

David Davis vs Liam Fox

In June, Brexit secretary David Davis suggested the negotiations to leave the EU were more complicated than landing on the moon.

His fellow Brexiteer Liam Fox, on the other hand, said in July that a future UK-EU trade deal should be “the easiest in human history”. Then again, maybe he just has a different definition of easy.

4. Single market and customs union

David Davis vs Philip Hammond

Perhaps one reason the Brexit secretary is finding it so tricky is that on 27 June he told a conference he plans to leave the single market and customs union by March 2019

But the Chancellor, aka the Mopper Up of Economic Mess, stressed Britain was heading down a “smooth and orderly path”. 

5. EU army

Michael Fallon vs Boris Johnson

In 2016, fresh from a Leave campaign which warned of the dangers of an EU army, foreign secretary Boris Johnson voiced his support for… an EU army.

Defence secretary Michael Fallon, though, had previously said the UK would continue to resist any rival to Nato. 

6. The migration cap

Theresa May vs David Davis and Philip Hammond

As home secretary, Theresa May defended the net migration cap, an idea the Tories thought up while in opposition, even though in practice it was widely criticised and never met. Even though, according to the George Osborne-edited Evening Standard, none of her colleagues privately back the target, it has stayed under her premiership. 

Some ministers have publicly questioned it as well. As early as March, Davis said immigration might go up after the UK leaves the EU.  In June, Hammond said the system for businesses recruiting foreign workers would not be more “onerous” than it is at present. 

(You can see all the ministers in the Brexit government that have realised reducing immigration might be a problem for them here)

 

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.