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Thursday, 4 February 2010

A New Economic Model: Part 2


A New Economic Model: Eight Benchmarks for Britain.

This is my analysis of George Osborne's economic policy should the Conservatives win the next election.

1 Ensure macroeconomic stability

That's a bit of a mouthful, don't you think they could have come up with a "benchmark" in terms that most people can relate to? Say: "Ensure a stable economy"?

The details:

"We will safeguard Britain's credit rating with a credible plan to eliminate a large part of the structural deficit over a Parliament. Our fiscal policy will seek to help keep interest rates lower for longer."

Well, if the credit rating is so important, why have you been talking down the economy for the last year? Why have you taken every opportunity to say "we are going to lose our AAA credit rating (nudge, nudge, wink, wink)"? You know damned well that these credit ratings are based on confidence in the economy and constant rumours undermine that confidence. 

Update (23/2/2010): Mervyn King the Governor of the bank of England, and someone key to Osborne's economic plan, says that the country's credit rating is not under threat.

"'I don't believe the rating agencies are concerned, in the sense that they are not re-rating the UK and I would be very surprised if they were to do so,' he said. He said that ratings agencies would remain somewhat 'uncertain' about the fiscal outlook for the UK economy, but the UK's AAA-rating wouldn't be down-graded."

With this evidence made public, would Osborne and Cameron now stop talking down the economy?

"A Conservative Government will hold an emergency Budget within 50 days of taking office to set out a credible plan to eliminate in large part the structural current budget deficit over a Parliament. …the case for starting early to establish credibility is overwhelming."

Clearly this document was printed before Cameron and Osborne's U-turn after Davos, ("We're not talking about swingeing cuts.") An emergency budget is by definition for an emergency, and hence will mean taking drastic measures. Osborne's original benchmark document suggests that there will be emergency measures (ie swingeing cuts), but Cameron's smooth talking to the public says something different. Cameron's U-turn is partly electoral: the public do not want to see early, swinging cuts at a time when they could force the country into a deeper recession. But the main reason is that influential economists are warning Cameron of the folly of Osborne's plan. Nobel prize winning economist, Joseph Stiglitz calls the Conservative party’s economic policy “crazy” and “out of touch with reality”.

The odd thing about this pledge (to maintain the AAA credit rating) is that the accountability is not to the British public, but to the credit rating companies. In my last post I said that Osborne's pledge to be "accountable" is hollow because it merely says that we have a one chance every five years to hold him to account, but at least we have that power. Osborne making the AAA credit rating a "benchmark" is giving that power to the credit rating companies. Hardly democracy, is it? Hardly accountable to us, is it?

Who are these credit rating companies? Well the first thing to say is that they are self appointed. We haven't appointed them. There are several agencies (for example, Moody's, Standard & Poor's, Fitch Ratings), the fact that there are several means that one company is not necessarily correct: that's what a free market is for, to give you a second opinion. So which will Osborne use? If he chooses one then there will be an obvious moral hazard, and Osborne could just choose the rating agency that gives the result he wants. Such details are not given in Osborne's "New Economic Model"

Further more, Joseph Stiglitz says about the Conservative claims that the country could lose the AA rating: “I think it’s fear mongering and I think the notion that the rating agencies, which did such a terrible job over rating all these these products, that we should show deference to their judgement of good economic policy seems outrageous.” Of course, George Osborne does not have a Nobel prize in economics, so  how can you expect him to understand details like this?

In effect this pledge is simply electioneering.

"The independent Bank of England will continue to target 2% CPI inflation and will use its new role in prudential supervision to preserve financial stability."

Who made the Bank independent? Who gave the Bank that responsibility of keeping CPI to 2%? So basically Osborne is saying: carry on as the Labour government is doing now? Well not quite. All of this talk of the Bank of England being independent is yet another platitude. The truth is that Osborne wants to control the Bank because his economic model is based on keeping interest rates low, and therefore he has to ensure that the Bank's Monetary Policy Committee always votes for the interest rate that Osborne desires.

The verdict:

Where is the benchmark, what is being measured? Well, there is the credit rating, but Osborne did not outline which rating agency will be used, so there is clearly room for selective metrics. Note that since the credit rating will affect the cost of government borrowing, the current Labour government will already be making sure that the rating is protected. There is also the inflation rate, but this is already a "benchmark" for the current Labour government. There is nothing new in this policy.

Where is the accountability? After five years of a Cameron government the country can choose if they want to continue with Cameron and Osborne. In other words, the accountability is the same as it is at the moment.

As a benchmark, this fails miserably.

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