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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Vince Cable will need something snappier than a graduate tax to escape tuition fees

Perhaps he's placing his hopes in the “Anti Brexit People’s Liberation Front.” 

“We took power, and we got crushed,” Tim Farron said in what would turn out to be his final Autumn conference as Liberal Democrat leader, before hastening on to talk about Brexit and the need for a strong opposition.

A year and a snap election later, Vince Cable, the Lib Dem warhorse-turned-leader and the former Coalition business secretary, had plenty of cracks about Brexit.

He called for a second referendum – or what he dubbed a “first referendum on the facts” – and joked that he was “half prepared for a spell in a cell with Supreme Court judges, Gina Miller, Ken Clarke, and the governors of the BBC” for suggesting it".

Lib Dems, he suggested, were the “political adults” in the room, while Labour sat on the fence. Unlike Farron, however, he did not rule out the idea of working with Jeremy Corbyn, and urged "grown ups" in other parties to put aside their differences. “Jeremy – join us in the Anti Brexit People’s Liberation Front,” he said. The Lib Dems had been right on Iraq, and would be proved right on Brexit, he added. 

But unlike Farron, Cable revisited his party’s time in power.

“In government, we did a lot of good and we stopped a lot of bad,” he told conference. “Don’t let the Tories tell you that they lifted millions of low-earners out of income tax. We did… But we have paid a very high political price.”

Cable paid the price himself, when he lost his Twickenham seat in 2015, and saw his former Coalition colleague Nick Clegg turfed out of student-heavy Sheffield Hallam. However much the Lib Dems might wish it away, the tuition fees debate is here to stay, aided by some canny Labour manoeuvring, and no amount of opposition to Brexit will hide it.

“There is an elephant in the room,” the newly re-established MP for Twickenham said in his speech. “Debt – specifically student debt.” He defended the policy (he chose to vote for it in 2010, rather than abstain) for making sure universities were properly funded, but added: “Just because the system operates like a tax, we cannot escape the fact it isn’t seen as one.” He is reviewing options for the future, including a graduate tax. But students are unlikely to be cheering for a graduate tax when Labour is pledging to scrap tuition fees altogether.

There lies Cable’s challenge. Farron may have stepped down a week after the election declaring himself “torn” between religion and party, but if he had stayed, he would have had to face the fact that voters were happier to nibble Labour’s Brexit fudge (with lashings of free tuition fees), than choose a party on pure Remain principles alone.

“We are not a single-issue party…we’re not Ukip in reverse,” Cable said. “I see our future as a party of government.” In which case, the onus is on him to come up with something more inspiring than a graduate tax.

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.