Osborne: hopefully a fake
Today, George Osborne set out the most austere budget the country has seen in 30 years. Here’s hoping it was a sham—that the government is misleading the country and the world about the scale of the cuts it is about to implement. If he’s as smart as he thinks he is, Osborne will have decided on a course of dishonesty in the national interest.
The danger of a violent fiscal tightening has been well-flagged by the Labour party and by economists like David Blanchflower: by cutting too far, too fast, the government risks tipping the country into a second recession, one that will see long-term unemployment rise, causing lasting damage to our social fabric.
Maybe, say supporters of austerity, but look at the alternative. If we don’t administer our own medicine, the markets may take it upon themselves to do it for us, and the markets
CityBoy
Unfortunately this analysis misses the fact that manipulating the economic reality was precisely what got Greece into the crisis in the first place.
In 2004 George Alogoskoufis, then Greece’s finance minister, admitted that the country joined the single currency in 2001 on the basis of figures that incorrectly showed a budget deficit of below 3% (the maximum allowed under the Maastricht criteria). In fact, Alogoskoufis acknowledged, the deficit had never fallen below 3% since 1999.
The Greek fiscal crisis has a great deal to do with the country’s lack of credibility in international markets. This credibility gap has exacerbated the country’s dire financing needs by making prospective lenders unwilling to extend credit without being paid a significant and almost ruinous premium for doing so.
If we want Britain to follow a similar route to Greece then the above suggestion would be pretty much on the money. If we are to avoid it, maintaining international fiscal credibility must be of paramount importance. Politicking on this issue is simply not an option.
Matt
This is an absolutely terrible idea. Yes, some short term gain might be found by manipulating the perceptions of the bond market, but will that change the hard data? Unless the author is advocating outright accounting fraud, the numbers reflecting Britain’s growing debt problem will not change.
Tracy W
So the optimal strategy is for governments to lie to their citizens?
How does this work? After all, if governments don’t cut spending then they have to raise money in one of three ways – by raising taxes, by increasing inflation, or by borrowing it from financial markets. Presumably consumers will notice when their taxes rise, banks will notice when the Central Bank starts releasing more credit, and financial markets will notice when the government starts auctioning off large sums of government debt. If your solution is that people are stupid and won’t notice this if the government does it cleverly enough, why do you think that the people in government would be smart enough to pull off the needed sneakiness?
I have no objection per se to macroeconomic theories based on the assumption that people are stupid or irrational, but I am suspicious of any theory that assumes that people in markets are irrational while people in government are rational. That’s a distinctly shaky foundation.