The IMF has debunked the myth of Osborne's fiscal "credibility"

Slowing the cuts would not trigger a bond market revolt.

There is a huge amount of interesting material in the full IMF staff report on the UK, released today, in particular the lasting damage ("hysteresis" to economists) done by this prolonged period of very low growth.  But in this post I wanted to draw attention to one particular paragraph (it is para 43 on page 38).   I reproduce it here in full:

Some further slowing of consolidation is unlikely to trigger major market turmoil

43. Further slowing consolidation would likely entail the government reneging on its net debt mandate. Would this trigger an adverse market reaction? Such hypotheticals are impossible to answer definitively, but there is little evidence that it would. In particular, fiscal indicators such as deficit and debt levels appear to be weakly related to government bond yields for advanced economies with monetary independence. Though such simple relationships are only suggestive, they indicate that a moderate increase in the UK’s debt-to-GDP ratio may have small effects on UK sovereign risk premia (though a slower pace of fiscal tightening may increase yields through expectations of higher near-term growth and tighter monetary policy).  This conclusion is further supported by the absence of a market response to the easing of the pace of structural adjustment in the 2011 Autumn Statement. Bond yields in the US and UK during the Great  Recession have also correlated positively with equity price movements, indicating that bond yields have been driven more by growth expectations than fears of a sovereign crisis.

This couldn't be clearer.  It is saying two things.  First, the reason long-term gilt yields are low in the UK (and similarly in virtually every other "advanced economy with monetary independence") is weak growth, not "confidence" or "credibility".  "Bond yields are driven more by growth expectations."  That is, yields are low not because of economic confidence but because of its exact opposite. This is precisely what I and others (Simon Wren-Lewis here, and of course Paul Krugman in the US) have long been arguing.  Indeed, the specific evidence the IMF cites - that yields have fallen when stock markets have fallen - is precisely that, in the UK, I first pointed  here a year ago.  

Second, that there is no reason to believe that slowing fiscal consolidation would "trigger an adverse market reaction".  In other words, when the Chancellor said that "these risks [of slowing consolidation] are very real, not imaginary", he was, once again, indulging in evidence-free speculation, not serious analysis.  Indeed, the Fund accurately points out that the main reason yields might rise (slightly, not precipitiously) if fiscal policy were to be loosened would be because of "expectations of higher near-term growth". As I pointed out here, this would be good news.

So, the IMF agrees that the reason gilt yields are low is because of weak growth, not confidence; and that we could loosen policy with minimal risk and probable benefit.  This is an explicit endorsement of the argument set out by Paul Krugman and Richard Layard (and endorsed by a long list of eminent economists, not to mention me) in their Manifesto for Economic Sense:  "there is massive evidence against the confidence argument; all the alleged evidence in favor of the doctrine has evaporated on closer examination."

 As I noted, the Fund's recommendations are, to be polite, inconsistent. But the analysis is spot on. And it explodes whatever is left of the credibility of the analysis underlying the government's fiscal strategy.

This piece originally appeared on Jonathan Portes's blog Not the Treasury view ...

George Osborne, "indulging in evidence-free speculation, not serious analysis." Photograph: Getty Images.

Jonathan Portes is director of the National Institute of Economic and Social Research and former chief economist at the Cabinet Office.

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“Trembling, shaking / Oh, my heart is aching”: the EU out campaign song will give you chills

But not in a good way.

You know the story. Some old guys with vague dreams of empire want Britain to leave the European Union. They’ve been kicking up such a big fuss over the past few years that the government is letting the public decide.

And what is it that sways a largely politically indifferent electorate? Strikes hope in their hearts for a mildly less bureaucratic yet dangerously human rights-free future? An anthem, of course!

Originally by Carly You’re so Vain Simon, this is the song the Leave.EU campaign (Nigel Farage’s chosen group) has chosen. It is performed by the singer Antonia Suñer, for whom freedom from the technofederalists couldn’t come any suñer.

Here are the lyrics, of which your mole has done a close reading. But essentially it’s just nature imagery with fascist undertones and some heartburn.

"Let the river run

"Let all the dreamers

"Wake the nation.

"Come, the new Jerusalem."

Don’t use a river metaphor in anything political, unless you actively want to evoke Enoch Powell. Also, Jerusalem? That’s a bit... strong, isn’t it? Heavy connotations of being a little bit too Englandy.

"Silver cities rise,

"The morning lights,

"The streets that meet them,

"And sirens call them on

"With a song."

Sirens and streets. Doesn’t sound like a wholly un-authoritarian view of the UK’s EU-free future to me.

"It’s asking for the taking,

"Trembling, shaking,

"Oh, my heart is aching."

A reference to the elderly nature of many of the UK’s eurosceptics, perhaps?

"We’re coming to the edge,

"Running on the water,

"Coming through the fog,

"Your sons and daughters."

I feel like this is something to do with the hosepipe ban.

"We the great and small,

"Stand on a star,

"And blaze a trail of desire,

"Through the dark’ning dawn."

Everyone will have to speak this kind of English in the new Jerusalem, m'lady, oft with shorten’d words which will leave you feeling cringéd.

"It’s asking for the taking.

"Come run with me now,

"The sky is the colour of blue,

"You’ve never even seen,

"In the eyes of your lover."

I think this means: no one has ever loved anyone with the same colour eyes as the EU flag.

I'm a mole, innit.