After yesterday’s stunningly bad GDP figures, David Cameron’s plea for the world to “invest in Britain” can’t help sounding desperate. The world might reasonably ask why it should spend money in a country that, Italy aside, is the only G20 member to be in recession. Cameron needs to invest in the UK before anyone else will.
The problem for the Prime Minister is that he tied his hands in advance by perpetrating the myth that even a small stimulus would “bankrupt” Britain. The truth, as Jonathan Portes wrote on The Staggers last week, is that there is no evidence that borrowing for growth (in the form of tax cuts and higher infrastructure spending) would trigger a bond market revolt. As even the IMF stated in its recent assessment of the British economy:
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.
The coalition’s decision to cut net investment by 47.9 per cent was a political choice, not an economic necessity.
Cameron and George Osborne are fond of pointing out that we can borrow at the lowest rates in our history (largely owing to our non-membership of the euro and the Bank of England’s quantitative easing programme) but they have done nothing to take advantage of this fact. The result, with consumer spending depressed and businesses hoarding cash, is that growth has collapsed. Now, as I pointed out yesterday, Britain’s AAA rating is in danger. A downgrade probably wouldn’t lead to a rise in borrowing costs (as the experience of the US demonstrates) but it would be politically disastrous for Osborne. The Chancellor, ignoring advice to the contrary, chose to make our AAA credit rating the ultimate symbol of fiscal “credibility”. Without it, he has none.