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 senior fellow The UK in a Changing Europe and Professor of Economics and Public Policy, King’s College London.

Getty
Show Hide image

Inside a shaken city: "I just want to be anywhere that’s not Manchester”

The morning after the bombing of the Manchester Arena has left the city's residents jumpy.

On Tuesday morning, the streets in Manchester city centre were eerily silent.

The commuter hub of Victoria Station - which backs onto the arena - was closed as police combed the area for clues, and despite Mayor Andy Burnham’s line of "business as usual", it looked like people were staying away.

Manchester Arena is the second largest indoor concert venue in Europe. With a capacity crowd of 18,000, on Monday night the venue was packed with young people from around the country - at least 22 of whom will never come home. At around 10.33pm, a suicide bomber detonated his device near the exit. Among the dead was an eight-year-old girl. Many more victims remain in hospital. 

Those Mancunians who were not alerted by the sirens woke to the news of their city's worst terrorist attack. Still, as the day went on, the city’s hubbub soon returned and, by lunchtime, there were shoppers and workers milling around Exchange Square and the town hall.

Tourists snapped images of the Albert Square building in the sunshine, and some even asked police for photographs like any other day.

But throughout the morning there were rumours and speculation about further incidents - the Arndale Centre was closed for a period after 11.40am while swathes of police descended, shutting off the main city centre thoroughfare of Market Street.

Corporation Street - closed off at Exchange Square - was at the centre of the city’s IRA blast. A postbox which survived the 1996 bombing stood in the foreground while officers stood guard, police tape fluttering around cordoned-off spaces.

It’s true that the streets of Manchester have known horror before, but not like this.

I spoke to students Beth and Melissa who were in the bustling centre when they saw people running from two different directions.

They vanished and ducked into River Island, when an alert came over the tannoy, and a staff member herded them through the back door onto the street.

“There were so many police stood outside the Arndale, it was so frightening,” Melissa told me.

“We thought it will be fine, it’ll be safe after last night. There were police everywhere walking in, and we felt like it would be fine.”

Beth said that they had planned a day of shopping, and weren’t put off by the attack.

“We heard about the arena this morning but we decided to come into the city, we were watching it all these morning, but you can’t let this stop you.”

They remembered the 1996 Arndale bombing, but added: “we were too young to really understand”.

And even now they’re older, they still did not really understand what had happened to the city.

“Theres nowhere to go, where’s safe? I just want to go home,” Melissa said. “I just want to be anywhere that’s not Manchester.”

Manchester has seen this sort of thing before - but so long ago that the stunned city dwellers are at a loss. In a city which feels under siege, no one is quite sure how anyone can keep us safe from an unknown threat

“We saw armed police on the streets - there were loads just then," Melissa said. "I trust them to keep us safe.”

But other observers were less comforted by the sign of firearms.

Ben, who I encountered standing outside an office block on Corporation Street watching the police, was not too forthcoming, except to say “They don’t know what they’re looking for, do they?” as I passed.

The spirit of the city is often invoked, and ahead of a vigil tonight in Albert Square, there will be solidarity and strength from the capital of the North.

But the community values which Mancunians hold dear are shaken to the core by what has happened here.

0800 7318496