Matthew Hancock-Mp

Labour are drawing the wrong lessons from America

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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