In the Financial Times yesterday, Martin Wolf argues that cutting too early will lead to the recession getting worse. (You'll need to register to read this article.)
Wolf quotes Adam Posen, (outside member of the Bank of England’s monetary policy committee) who points out that the danger is not that Britain will become a Greece, but that Britain would become a Japan. The Osborne plans to cut at a time when cuts will be the most damaging will lead us to the deflationary limbo that Japan is suffering now, and that the US suffered in 1937.
As to whether the UK is in as bad a shape as Cameron makes it out to be, Wolf says:
US government 10-year bond rates are a mere 3.2 per cent, down from 3.9 per cent on June 10 2009, Germany’s are 2.6 per cent, France’s 3 per cent and even the UK’s only 3.4 per cent.
This is saying that the bond market see the UK debt as manageable and not the huge risk that Cameron claims it is. Wolf then says:
What about default risk? Markets seem to view that as close to zero: interest rates on index-linked bonds in the France, Germany, the UK and US are about 1 per cent. What, for that matter, does the spread between conventional and index-linked bonds tell us about inflation expectations? We can say that these are, happily, still well anchored, at about 2 per cent in the US, Germany and France. In the UK, they are somewhat higher.
So the markets say that the chance of default is close to zero and the chance of high inflation is very small too. The markets like the economy that Labour left the ConDems.
Wolf finishes by saying:
Premature fiscal tightening is, warns experience, as big a danger as delayed tightening would be. There are no certainties here. The world economy – or at least that of the advanced countries – remains disturbingly fragile. Only those who believe the economy is a morality play, in which those they deem wicked should suffer punishment, would enjoy that painful result.