Credibility and the confidence fairies

Low interest rates have nothing to do with "our hard-won credibility"

In 1994, the Conservative Government proposed a rise in fuel VAT from 8 per cent to 17.5 per cent. It was defeated by a Labour-backed motion and Shadow Chancellor Gordon Brown looked to have won a major economic battle. But Chancellor Ken Clarke made a stirring speech defending the economic fundamentals of the policy and accusing Labour of recklessly undermining the nation’s prosperity, culminating by calling Brown a "silly billy".

Today, David Cameron made his own stirring speech, laying out his plan for how Britain could finally begin a recovery. But like Clarke before him, he wanted to defend his economic fundamentals from the Labour line, saying:

Those who argue we should spend more want us to borrow more, driving up our deficit and our debt and putting our hard-won credibility and low interest rates at risk.

The argument behind all this is, of course, whether the government is right to make deficit reduction "line one, clause one, part one" or whether a slower approach would make the economy grow faster, which would increase the size of the pie, allowing more debt to be paid off.

Despite losing public backing for their tackling of the economy as well as outspoken criticism from the economics profession – for example, Nobel Prize-winner Paul Krugman here – the government will not be fazed.

And it all rests on one argument:

Government bond yields are at an all-time low, which means the UK is seen as a safe place of investment and therefore the government’s plan is the right one. Economics professors across the Golden Triangle must squirm every time they hear another one of their protégés pull this one out on Question Time.

And that is because the low-bond-yield argument is a choreographed hoodwinking of the British public. To say that our rates are 1.85 per cent, compared to 6 per cent in Ireland, 12 per cent in Portugal and 28 per cent in Greece, is like saying that the PM picks up a tan quicker than an inmate of Her Majesty’s Prison Service. Yields reflect risk, and in those countries, there is real risk that the Governments will default on their debts. The same has never been said of the UK.

Instead the "risk premium" paid on gilts is based on the fact that we are a safe haven in a turbulent financial world and investors are willing to accept lower returns than normal because their risk in the UK is relatively lower than in the Eurozone. But this is not normal. Look up any economics textbook, it will tell you that the more global investors buy Government bonds, the more they are at risk (of losing money if the pound depreciates), therefore the higher the risk and the rate will be; in normal times bond yields are high the more of them are supplied to the private sector.

Indeed, as Jonathon Portes highlights here, confidence has grown in the UK at the start of 2012 (as measured by the rise in share prices of FTSE250 companies) and the bond-yield has risen alongside it. His graph is below:

More worryingly, a recent paper has shown empirically that current ten-year bond yields are a good benchmark of growth rates in ten years’ time. That would mean 1.85 per cent growth by 2022- the OBR expect 3 per cent growth by 2015.

But what about the interest rates that the PM is so keen to keep down for the sake of struggling homeowners?

As an economy grows in confidence and bond yields rise, yes, eventually interest rates should rise too, so mortgage and loan repayments will increase. But surely this is to be expected in a healthy, growing economy, with increasing incomes?

A Manchester United fan, for example, must accept that the price of supporting Manchester United is that you will pay higher ticket prices than you would as a Wigan fan.

Low interest rates are a symptom of the problem, not the solution.

This can be seen quite clearly in a country whose interest rates and bond yields have been rock bottom for over a decade: Japan. The charts below compare GDP (only up to 2007, to focus more clearly on growth trends before the recession), 10-year government bond yields and interest rates for the UK and Japan since 1992, when the Japanese economy sank into a recession from which it has never fully recovered.

Click for big

Indeed, Japanese homeowners are now accustomed to close-to-zero interest rates following a “lost decade”. Is that the ultimate aim of the UK Government’s austerity plan? If not, they might be forced before long to accept that Labour had it right all along. Silly billies.

Pictured: Confidence fairies. Maybe. Photograph: Getty Images

Dom Boyle is a British economist.

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Find the EU renegotiation demands dull? Me too – but they are important

It's an old trick: smother anything in enough jargon and you can avoid being held accountable for it.

I don’t know about you, but I found the details of Britain’s European Union renegotiation demands quite hard to read. Literally. My eye kept gliding past them, in an endless quest for something more interesting in the paragraph ahead. It was as if the word “subsidiarity” had been smeared in grease. I haven’t felt tedium quite like this since I read The Lord of the Rings and found I slid straight past anything written in italics, reasoning that it was probably another interminable Elvish poem. (“The wind was in his flowing hair/The foam about him shone;/Afar they saw him strong and fair/Go riding like a swan.”)

Anyone who writes about politics encounters this; I call it Subclause Syndrome. Smother anything in enough jargon, whirr enough footnotes into the air, and you have a very effective shield for protecting yourself from accountability – better even than gutting the Freedom of Information laws, although the government seems quite keen on that, too. No wonder so much of our political conversation ends up being about personality: if we can’t hope to master all the technicalities, the next best thing is to trust the person to whom we have delegated that job.

Anyway, after 15 cups of coffee, three ice-bucket challenges and a bottle of poppers I borrowed from a Tory MP, I finally made it through. I didn’t feel much more enlightened, though, because there were notable omissions – no mention, thankfully, of rolling back employment protections – and elsewhere there was a touching faith in the power of adding “language” to official documents.

One thing did stand out, however. For months, we have been told that it is a terrible problem that migrants from Europe are sending child benefit to their families back home. In future, the amount that can be claimed will start at zero and it will reach full whack only after four years of working in Britain. Even better, to reduce the alleged “pull factor” of our generous in-work benefits regime, the child benefit rate will be paid on a ratio calculated according to average wages in the home country.

What a waste of time. At the moment, only £30m in child benefit is sent out of the country each year: quite a large sum if you’re doing a whip round for a retirement gift for a colleague, but basically a rounding error in the Department for Work and Pensions budget.

Only 20,000 workers, and 34,000 children, are involved. And yet, apparently, this makes it worth introducing 28 different rates of child benefit to be administered by the DWP. We are given to understand that Iain Duncan Smith thinks this is barmy – and this is a man optimistic enough about his department’s computer systems to predict in 2013 that 4.46 million people would be claiming Universal Credit by now*.

David Cameron’s renegotiation package was comprised exclusively of what Doctor Who fans call handwavium – a magic substance with no obvious physical attributes, which nonetheless helpfully advances the plot. In this case, the renegotiation covers up the fact that the Prime Minister always wanted to argue to stay in Europe, but needed a handy fig leaf to do so.

Brace yourself for a sentence you might not read again in the New Statesman, but this makes me feel sorry for Chris Grayling. He and other Outers in the cabinet have to wait at least two weeks for Cameron to get the demands signed off; all the while, Cameron can subtly make the case for staying in Europe, while they are bound to keep quiet because of collective responsibility.

When that stricture lifts, the high-ranking Eurosceptics will at last be free to make the case they have been sitting on for years. I have three strong beliefs about what will happen next. First, that everyone confidently predicting a paralysing civil war in the Tory ranks is doing so more in hope than expectation. Some on the left feel that if Labour is going to be divided over Trident, it is only fair that the Tories be split down the middle, too. They forget that power, and patronage, are strong solvents: there has already been much muttering about low-level blackmail from the high command, with MPs warned about the dire influence of disloyalty on their career prospects.

Second, the Europe campaign will feature large doses of both sides solemnly advising the other that they need to make “a positive case”. This will be roundly ignored. The Remain team will run a fear campaign based on job losses, access to the single market and “losing our seat at the table”; Leave will run a fear campaign based on the steady advance of whatever collective noun for migrants sounds just the right side of racist. (Current favourite: “hordes”.)

Third, the number of Britons making a decision based on a complete understanding of the renegotiation, and the future terms of our membership, will be vanishingly small. It is simply impossible to read about subsidiarity for more than an hour without lapsing into a coma.

Yet, funnily enough, this isn’t necessarily a bad thing. Just as the absurd complexity of policy frees us to talk instead about character, so the onset of Subclause Syndrome in the EU debate will allow us to ask ourselves a more profound, defining question: what kind of country do we want Britain to be? Polling suggests that very few of us see ourselves as “European” rather than Scottish, or British, but are we a country that feels open and looks outwards, or one that thinks this is the best it’s going to get, and we need to protect what we have? That’s more vital than any subclause. l

* For those of you keeping score at home, Universal Credit is now allegedly going to be implemented by 2021. Incidentally, George Osborne has recently discovered that it’s a great source of handwavium; tax credit cuts have been postponed because UC will render such huge savings that they aren’t needed.

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 11 February 2016 issue of the New Statesman, The legacy of Europe's worst battle