Labour are drawing the wrong lessons from America
Matthew Hancock MP 9:29am
The global debate about how we live within our means is moving fast. I spent a week in
Washington while Congress and the President hammered out their deal on this year’s budget. The deal was significant because all sides agreed on the need to cut spending now. After days of
brinkmanship, they agreed to £38 billion in-year cuts. Significant, perhaps, because America has now started to tackle its huge deficit. But everyone agreed it is a small downpayment ahead of
a much bigger debate to come.
What’s fascinating for us here is that President Obama’s proposals are to cut the deficit slightly faster than we are here. Congress would go faster still. The Coalition’s plan is
to reduce the deficit by just over 8 per cent of GDP over five years, or around 1.6 per cent a year. Obama’s plan is to reduce it by just over 8 per cent of GDP over four years — around
2.1 per cent a year. Obama wants, like us, for debt to be falling as a proportion of GDP by the second half of the decade. The White House proposal is three quarters spending cuts, one
quarter tax rises. The Government’s plan is 76 per cent to 24 per cent over this Parliament.
And yet — even with agreement on the need to cut — because there are no agreed specifics to the US plans, the rating agency Standard and Poor's responded with the shock news that it has placed the US credit rating on negative watch.
The consequence? US interest rates have risen, just as they would do here if we were foolish enough to abandon our plan. Like it or not, no country can pretend that they don’t need to show
their creditors that they have a plan to pay them back. Meanwhile, investors are talking about “piling into the safe haven gilt market,” because the UK has a credible plan to deal with
our debts.
The down-marking of US debt, and the reaction of US interest rates that followed, shows the gamble we would be taking if we abandoned our plan. The risk is not in dealing with our debts. The risk
would be to abandon the plan to deal with our debts and to bet that our creditors would not extract a huge price.
Since these momentous events, we have sadly heard from Labour that they are still committed to this reckless gamble. They continue to argue that the examples on our doorstep of Ireland and Portugal
should be ignored. And to call a credit rating downgrade a “public relations opportunities” is absurd when it has meant an increase in interest rates across America. And today Ed Balls
gets his figures wrong too. He argues that Obama’s plan is to eliminate the deficit in 12
years, not four. But Balls has muddled the structural deficit — that part what won’t come back automatically — with the entire deficit that Obama will take 12 years to shed (a
confusion that runs in the Labour
family). Surely Balls must know that he is making this muddle? If it really was a mistake, not an attempt to pull the wool over people's eyes, then that helps explain why he left us in such a
mess.
Events are confirming that we must deal decisively with our debts. Those arguing we should abandon the plan and instead leave our debts to our children sound increasingly desperate. Labour have got
this wrong and they know it.
These events confirm what every family knows: when you’ve got a debt problem, the longer you leave it, the worse it gets.
UPDATE: I see Labour's Duncan Weldon has responded to my post.
He points out that according to an IMF report (that came out before Obama's budget) Britain's fiscal adjustment is the biggest. Too right. Labour left Britain with a colossal deficit. My point was about the speed of dealing with it.
He asks for evidence bond rates rose and I'm happy to provide it here. And you only have to look to Portugal to see how it can all go wrong.
I couldn't help but notice Labour did not rebut the key parts of my argument: that America is now focussed on dealing with her debt. Labour are almost the only ones left denying the need to do so.
UPDATE 2: A reader takes issue with Matthew Hancock's claim that US bond rates rose after the Standard and Poor's announcement on 18 April 2011, on the basis that this was the case
for only one of the nine maturities issued by the US government. We offer his comments as a clarification:
"The US government issues debt of 9 different maturities (3-month, 6-month, 12-month, 2-year, 3-year, 5-year, 7-year, 10-year, 30-year).On the 18th April, yields on all of these maturities fell.
On the 19th April, yields on 5 of these maturities fell. 3-month, 6-month, and 3-year treasuries were unchanged, and the yield on 1 maturity, 5-year treasuries, rose by 0.3 basis points, from 2.0629% to 2.0662% (i.e by three thousandths of a percentage point).
Mr Hancock published his blog post at 9.29am on the 20th, thus approximately 4.5 hours before the US stock market opened on the 20th, so his remarks can only be taken to refer to the 18th and 19th April. Yields did rise on the 20th, but this was after Mr Hancock's posting."
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Greg
April 20th, 2011 10:00am Report this commentWhy does Matthew Hancock post on here?
Obviously CoffeeHouse is conservative-leaning, but the independence of its analysis is key.
If I wanted to read an MP's propaganda, I'd go on his personal website.
sandy
April 20th, 2011 10:21am Report this commentIt's not a "muddle",it's deliberate.
Balls is devious and dangerous,but not deluded.
He realises that most of the public can't tell the difference between the deficit and the debt,never mind the structural deficit and the entire deficit,so is happy to encourage that confusion.
ollie
April 20th, 2011 10:22am Report this commentLabour governments cannot exist without amassing huge debt. That's the price of socialism, is it not?
Lonesome Dave
April 20th, 2011 10:24am Report this commentFollowing 13 years of Labour folly why anyone continues to report on the latest tribalist 'thoughts' of failed concepts as promoted by Balls, Miliband & Brown is quite beyond me.
Comrade Brown wants to be head of the IMF? Miliband thinks it's a good idea? Oh dear.
Perry
April 20th, 2011 10:31am Report this commentPork Barrel politics is it not? Very similar to the position here in gb where, 'downside', the pork barrels are firmly in the hands of the grasping members of the Politburo and the EUSSR.
Hans Castorp
April 20th, 2011 10:39am Report this commentOh dear. Mr Hancock: US interest rates fell on the the downgrade. They did not rise.
Given your whole post here turns on an error of fact, you might want to think again.
dorothy wilson
April 20th, 2011 11:24am Report this commentI have just cleared the outstanding balance on my credit card, as I do every month.
However, the statement lists the minimum payment as £5 but that figure is followed by a paragraph stating:
"If you only make the minimum payment each month, it will take longer and cost you more to clear your balance".
Someone needs to remind Mr Balls that the same applies to reducing the deficit.
Maggie
April 20th, 2011 11:33am Report this commentEd Balls, and David Blanchflower, have staked their reputations on Osborne being wrong. They're just going to go on plugging away at their discredited theories no matter how much evidence is stacked against them. Their careers are at stake.
Will Rees
April 20th, 2011 11:41am Report this commentUS interest rates didn't rise.
US bond rates might have risen a little bit but, thats because a lot of "smart" money has been moving out of US treasury bonds over the last month. It is that movement that I suspect caused S&P, to talk of a downgrade. Moody's and Fitch Ratings probably go along with James Galbraith :““US debt consists of bonds issued in US dollars, which I assume the S&P analysts know. How can the US possibly default on its own currency? The obligation is in nominal dollars, which is to say when the bond retires, the US issues a check in dollars to cover it.”
ps
I can't stand Ed Balls,
Robert Eve
April 20th, 2011 11:56am Report this commentRemind me why The Labour Party is still legal in this country?
Justathought
April 20th, 2011 12:30pm Report this commentHold on! Didn't Obama ignore this report he commissioned?
THE NATIONAL COMMISSION
ON FISCAL RESPONSIBILITY
AND REFORM
Pete Wass
April 20th, 2011 1:03pm Report this commentIt is worth noting that most of the cuts in that $38 billion are accounting gimmicks. As with the coallition's "cuts" there is not much change if any in the level of spending.
Of faar more importance will be the concessions he gets for raising the debt ceiling and the next budget.
Pot Head
April 20th, 2011 1:07pm Report this commentWhy is deficit denier used and allowed by the right, but not Climate Change denier?
Call them a Climate Change denier, and those same people scream blue murder about Nazi imagery.
yank
April 20th, 2011 3:05pm Report this commentI think it is you that is learning the wrong lessons from America, Mr. Hancock.
First, there was no $38B in budget cuts in the recent budget deal, no matter the blather repeated here in your blogpost. Obama's original budget proposal was approved almost to the dollar. Like your Mr. Cameron, our government has for now chosen to maintain spending at the astronomical levels it's currently at.
Our government, like Cameron's, has chosen to inflate away their deficit and debt. We see that inflation, and the economic stagnation that is accompanying it, which has long been evident as stagflation in your country, and is now becoming such here. Low or no growth... plus inflation. Stagflation.
The one difference in governmental policy between the two countries is Cameron's policy of tax increases, slammed down on a weak British economy. In contrast, our government here has maintained income tax rates, for the next 2 years at least, as signed off by Mr. Obama last December. So your body politic is to the economic Left of Mr. Obama here, evidently.
I'd also suggest you sharpen your use of the English language. It is disingenuous of you to continue to cloud the debate with this "structural deficit" argument. Your arguments are easily dismissed at this first sign of rhetorical trickery. As there I’m certain, we here certainly know the items that drive our deficit, but most importantly, we know the total amount of that deficit. Distractions of the form that somehow the leftists running your current government are dealing with the "structural deficit" are just distractions. Your government is running a massive deficit, and it is taxing and inflating its way out of it. Your opposition can yammer whatever partisan nonsense it wants, but they know this, too. So should you.
Obama hasn't proposed a balanced budget, not in 12 years, not ever. You're mistaken in claiming otherwise (and just as mistaken in your claim that the wets running your government are proposing to balance yours). Hell, this horrible nation ravaging scourge called the “Ryan Budget” doesn’t get to balance until sometime in the 2030’s, and the only other plan seriously being discussed within our body politic to balance our budget doesn’t get there until 2020. However, Obama will never get there. Neither will Cameron. That’s their intent, to keep government at size. They are soulmates.
And so, stagflation is your lot. It may be ours as well.
JohnBUK
April 20th, 2011 7:28pm Report this commentWould someone blank out the doe-eyed twat in the background of the picture, it upsets me.
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