Osborne needs to hold the line
David Blackburn 9:05am
Even governors can be wrong. The Bank of England’s quarterly inflation report is
expected to downgrade its original growth forecasts and predict a sharp increase in inflation, albeit one that peaks this year and returns to the target rate by 2012. A spike in inflation is
scarcely surprising given the planned VAT rise, and the Bank’s original growth forecasts were, like Alistair Darling’s forecasts, absurdly over optimistic – predicting 3.4 percent
growth next year and 3.6 percent the year after. The Bank’s revisions needn’t trouble George Osborne, whose forecasts of 2.3 percent growth next year and 2.8 percent in 2012 were drawn
from the OBR.
However, the OBR may have over-estimated recovery too. In the last week there has been grim news on the retail confidence front, on jobs and on house prices. Against that, the UK trade deficit closed by £600m in July despite the pound rebounding by more than 3 percent against major trading partners; this is welcome but the small amount of trade recovery is a reminder that global confidence, and particularly European confidence, remains depressed. In other words, the British economy’s regression might not just be the consequence of Osborne’s cuts. The opposition will bray that Osborne has inaugurated a double-dip, but if global recovery estimates for the second quarter were over-cooked, then a slowdown may have been unavoidable.
Of course, the Bank and the Chancellor must prepare to weather decline without curtailing the necessary task of limiting national overspend. As Pete has noted, the cuts are not yet deep - £8.1bn out of an economy of £1.4tr is minimal. And Peter Lilley is correct when he tells the Times (£):
‘In the last three recessions we were told not to cut spending because we were going to make things worse and in each case that proved to be wrong. The way to ensure confidence is to show that something is being done about the deficit which allows you to pursue a more relaxed monetary policy.’
How relaxed that monetary policy should be is down to the Bank. It is highly unlikely that interest rates will go up at this stage as that will damage consumer confidence and lending. But there are rumours that some are putting the case for more Quantitative Easing to boost demand. The consequence of such a move would be to increase inflation yet further, which would be a huge political risk given the VAT rise. But, the threat of deflation has abated and Osborne may now want to gently inflate his way out of a debt crisis that the nation’s finances can’t sustain.
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TrevorsDen
August 11th, 2010 11:20am Report this commentThe economy is not regressing. It is returning to the natural equilibrium following the recession.
Its natural sadly painful return was disrupted by the last govts 'stimulus', ie pre election spending spree and the BoE's QE spree.
Remember the unemployment figures did not reach the levels predicted thanks to the spending and stimulus spree. Now that stimulus has ended the economy is revertiung to where it would have been. what we are witnessing is a failure of the stimulus.
We should not be surprised; if you eat your own liver you will die, you cannot lift yourself up by your own bootstraps, there is no such thing as a sky-hook and certainly there is no such thing as a free lunch.
Dave B
August 11th, 2010 12:01pm Report this commentRe: inflation. Edmund Conway suggests that HMG debts are index linked, so inflation would not help.
http://blogs.telegraph.co.uk/finance/edmundconway/100002782/a-dose-of-double-digit-inflation-might-be-wishful-thinking/
Molly
August 11th, 2010 12:20pm Report this commentWhy are falling house prices " grim news"? Anyone trying to climb the housing ladder should want cheaper houses. Better accommodation and more money to spend on everything else. Strange but true.
yank
August 11th, 2010 1:23pm Report this commentOsborne is not thinking bold enough, at least not publicly. This is all sorta weak tea stuff.
Now that the initial austerity program has sold, and the political dogs have been collared, now you have to snap the leash. Those who have bought in are IN now. They will hang together, or they will surely hang separately. That's Osborne's power here, and he can use it to push for even bolder reform, if he chooses.
And this will all sell to the public, if he works it right. Fine to open with a VAT increase, but if the populist champion Osborne suddenly discovers how destructive it is to the economy, people and jobs, it will provide opportunity for him to lean more heavily on spending austerity, and not tax increases.
Osborne can give them a choice. I predict the sensible British public will make the sensible choice, if it's posed timely and with clarity. We're almost at that time, because things change rapidly in this environment. God help Cameron and company if they don't recognize this, as seems to have occurred over here for example. What did that one Brit politician say? "Events, dear boy... events."
And Mr. Blackburn, I caught that little bit of cheerleading for inflation. Be careful what you wish for... and be careful of piggybacking a VAT increase on top of that wished-for.
TGF UKIP
August 11th, 2010 2:29pm Report this commentThe housing market is already in severe difficulties which are likely to accelerate as the few buyers there are for the masses of properties coming on are holding off for prices to drop lower - the classic deflationary trap. Add to that severe funding difficulties on the horizon for lenders and you have one of the principal props of consumer confidence removed.
Add to that the deep flaws in the Bigging Up of Boy George Budget with the heaping on of tax rises on wealth earners on top of large spending cuts and you have the direct route to reversing growth. Georgie Boy needs to find that borrowing is reducing rather faster than forecast by the PBS and reverse his income tax rises, and of course the 50%, but of course Vince and his other new friends won't let him do that.
Lucky, lucky Miliband.
Marcher Baron
August 11th, 2010 4:17pm Report this commentIf they're waiting for people like me (savings, fixed income and no debt) to save them by spending, they've got another think coming. I'm already spending my savings on essential bills because there is no interest rate to speak of so inflation is eroding the value of my money and I have precious little left after paying tax, water rates, council tax, food and heating for discretionary spending. If they don't increase interest rates but increase taxes I'll have even less to spare.
kinglear
August 11th, 2010 5:49pm Report this commentWell darn sarf things may be looking iffy ( but then, somebody just paid £150million for a flat in 1 Knightsbridge) but up here in Glasgow, things finally look as if they are turning the corner. Admitedly, we are always a bit behind up here, but the level of enquiries and actual rentals we are achieving is not only encouraging, it is positively mindblowing
denis cooper
August 12th, 2010 7:55am Report this commentThe perceived threat of deflation provided the publicly stated justification, one might say the cover, for quantitative easing.
Letter from King to Darling, 17 February 2009:
http://www.bankofengland.co.uk/monetarypolicy/pdf/govletter090305.pdf
"In your letter of 29 January, you requested that, if the MPC were to conclude that it might be useful to use asset purchases for monetary policy purposes, I should write to you setting out the Committee's reasons. At its February meeting, the Committee discussed its latest forecasts for GDP growth and CPI inflation. Those forecasts pointed to a substantial risk that inflation would undershoot the target in the medium term. That was a materially worse outlook than the Committee's previous central view. As a result, the MPC lowered Bank Rate by 0.5 percentage points to 1.0%. The Committee judged it likely that further reductions in Bank Rate alone might not be enough to bring inflation in line with the target in the medium term. As a result, the Committee unanimously concluded that it might be necessary to use asset purchases at future meetings in order to meet the 2% target for CPI inflation, and accordingly asked that I write to you."
And here is the reply from Darling to King, 3 March 2009, in which he authorised the use of "Central Bank Money" to purchase gilts, with the stated purpose of helping the MPC to meet its remit of maintaining price stability with a symmetrical inflation target of 2 per cent on the CPI measure:
http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/d/chxletter_boe050309.pdf
So if the threat of deflation has abated then the original cover for quantitative easing has disappeared.
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