The Times has an economics leader (£) today calling for the cutting of public spending to continue. It's a remarkably sloppy piece, straight out of the 2010 election campaign, and ignoring everything we have learned in the two and a half years since then.
The piece starts by pointing out that the Chancellor will have failed to cut debt as a proportion of GDP by the end of this parliament, something he initially staked his reputation on. It then, accurately, points out the the principal risks to Britain's economic health come from anaemic growth, not a collapse of "confidence".
The leader then runs through the failure, even after the third-quarter growth, of anything resembling the recovery, and comes tot he relatively sensible conclusion that Osborne ought to delay his fiscal targets.
Then it all goes off the rails:
The IMF has argued that increased borrowing should be tolerated rather than tackled with tax rises or further spending cuts. That does not mean that the Government has been wrong to seek a rapid reduction in the budget deficit. Cutting spending does not simply take demand out of the economy. It reduces sovereign risk and the premium that the Government has to pay on its borrowing. As sterling is not a reserve currency, maintaining fiscal credibility is an especially important task in economic management.
The low market interest rates that the UK needs to pay should be counted a success. They are a precondition of recovery.
Where to start. Cutting spending reduces sovereign risk? Are we still having this conversation? The UK controls its own currency, and exclusively issues bonds denominated in that currency. Sovereign risk is infinitesimal. We cannot go bust like Greece; we cannot default like Argentina. The worst thing that Britain could do is attempt to inflate its way out of debt; but that hasn't happened, and isn't going to happen, because spending is manageable, inflation is low, and interest rates are lower.
The leader also claims that cutting spending lowers "the premium that the Government has to pay on its borrowing". Which is again nonsense. As I wrote just two weeks ago, when Conservative MP Jesse Norman launched a bizarre attack on NIESR's Jonathan Portes:
Sovereign debt yields can be low either because investors think there is little chance of the nation going bankrupt, or because there is scant competition from other potential investments pushing up the yield. Since the crash, the chance of Britain defaulting hasn't changed from basically-zero, but the growth rate – and thus the average return on investment from putting your money in the "real" economy – has plummeted.
The status of Sterling as a reserve currency is also weird, inaccurate and slightly irrelevant. Sterling is a reserve currency – it is the world's third most held, after the euro and dollar. It is no longer the reserve currency, true – the dollar took that title after World War II – but that also has little to do with the importance of fiscal credibility.
And while the low market interest rates the UK needs to pay are helpful, they should not be considered a success. If anything, they are a sign of Osborne's economic failure. If the market truly expected a recovery, the first thing that would happen is interest rates would rise, as investors finally priced in the fact that they could expect real returns if they put their money elsewhere in the economy. As it is, returns on investment in government bonds remain close to zero, as investors flee to a safe haven.
Osborne needs, first and foremost, a plan to end this depression. Cutting spending acts against that goal. Market interest rates, and the risk of sovereign defaults, are irrelevancies to that question.