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«George Osborne: Recovery through fiscal responsibility Speech at the London School of Economics and Political Science (LSE) Friday 31 October 2008 On ...»

-- [ Page 4 ] --

“The speed with which the political debate already is turning to fiscal loosening raises risks that the overall fiscal loosening in the recession and pre-election period will be so big that the fiscal deficit itself will become a destabilising factor for the economy in coming years.” In other words, that Gordon Brown’s desire to spend his way out of the recession will not only make the recession worse, it will undermine the recovery too.

This is not some argument about economic theory.

This is about real lives, real jobs, real homes.

The risky consequences of irresponsibility are not merely a theoretical possibility, they are happening all around us.

The citizens of Ukraine, Hungary and Pakistan are now learning what happens when the markets lose confidence in a whole country.

Their sources of external financing that appeared to be reliable have dried up with astonishing speed.

Several countries in Eastern Europe, Asia and Latin America now risk a repeat of the Asian financial crisis of the late 1990s.

At the moment these problems are limited to emerging markets, but given the remarkable events of recent weeks we cannot be certain they will remain so.

The Governor of the Bank of England himself has highlighted Britain’s unusual dependence on external finance.

The coverage of Mervyn King’s speech last week was dominated by his use of the “R” word, but in a sobering passage he noted that “those external inflows have fallen sharply – a mild form of the reversal of capital inflows experienced by a number of emerging market economies in the 1990s.” That is an extraordinary parallel for the Governor of the Bank of England to have to make.





Even more sobering was the warning that followed: “Unless they are replaced by other forms of external finance, the adjustments in the trade deficit and exchange rate will need to be larger and faster than would otherwise have occurred, implying a larger rise in domestic saving and weaker domestic spending in the short run.” Rising domestic saving and weak domestic spending are central banker’s code for a severe and lasting recession.

Most of these capital inflows have been used to finance private sector borrowing, but the same dangers now apply to government borrowing.

In the fourteen quarters from the beginning of 2005 to the middle of this year, overseas investors bought three quarters of total net UK gilt issuance.

But the head of one fund has already warned that the Treasury can no longer take it for granted that foreign buyers will turn up at bond auctions: “We are nearing the point where Asian and Middle East investors are going to charge a much higher premium for holding British sovereign debt. Once a government loses credibility, these investment shifts can happen with alarming speed.” Already the spread on credit default insurance for UK Government debt has widened from almost zero a year ago to 60 basis points today.

That’s 50% higher than for French debt and twice as high as for German debt.

And there’s another vital reason why we must resist spending splurges and irresponsible borrowing.

An IMF survey published earlier this month concluded that “increases in interest rate risk premiums as a result of debt concerns can render fiscal multipliers negative, suggesting that discretionary fiscal stimulus may do more harm than good.” Put another way, there’s no point pumping more government money in one end of the economy if it delays the lower interest rates that will stimulate private sector activity at the other end.

There’s another reason for fiscal responsibility in a recession.

If you don’t keep control of public finances, you risk saddling your economy with so much debt that it stifles the recovery for many years to come.

That is not a rock of stability. It is more like a ball and chain.

So everyone needs to understand the true weakness of our fiscal position under Labour.

“The speed with which the political debate already is turning to fiscal loosening raises risks that the overall fiscal loosening in the recession and pre-election period will be so big that the fiscal deficit itself will become a destabilising factor for the economy in coming years.” In other words, that Gordon Brown’s desire to spend his way out of the recession will not only make the recession worse, it will undermine the recovery too.

This is not some argument about economic theory.

This is about real lives, real jobs, real homes.

The risky consequences of irresponsibility are not merely a theoretical possibility, they are happening all around us.

The citizens of Ukraine, Hungary and Pakistan are now learning what happens when the markets lose confidence in a whole country.

Their sources of external financing that appeared to be reliable have dried up with astonishing speed.

Several countries in Eastern Europe, Asia and Latin America now risk a repeat of the Asian financial crisis of the late 1990s.

At the moment these problems are limited to emerging markets, but given the remarkable events of recent weeks we cannot be certain they will remain so.

The Governor of the Bank of England himself has highlighted Britain’s unusual dependence on external finance.

The coverage of Mervyn King’s speech last week was dominated by his use of the “R” word, but in a sobering passage he noted that “those external inflows have fallen sharply – a mild form of the reversal of capital inflows experienced by a number of emerging market economies in the 1990s.” That is an extraordinary parallel for the Governor of the Bank of England to have to make.





Even more sobering was the warning that followed: “Unless they are replaced by other forms of external finance, the adjustments in the trade deficit and exchange rate will need to be larger and faster than would otherwise have occurred, implying a larger rise in domestic saving and weaker domestic spending in the short run.” Rising domestic saving and weak domestic spending are central banker’s code for a severe and lasting recession.

Most of these capital inflows have been used to finance private sector borrowing, but the same dangers now apply to government borrowing.

In the fourteen quarters from the beginning of 2005 to the middle of this year, overseas investors bought three quarters of total net UK gilt issuance.

But the head of one fund has already warned that the Treasury can no longer take it for granted that foreign buyers will turn up at bond auctions: “We are nearing the point where Asian and Middle East investors are going to charge a much higher premium for holding British sovereign debt. Once a government loses credibility, these investment shifts can happen with alarming speed.” Already the spread on credit default insurance for UK Government debt has widened from almost zero a year ago to 60 basis points today.

That’s 50% higher than for French debt and twice as high as for German debt.

And there’s another vital reason why we must resist spending splurges and irresponsible borrowing.

An IMF survey published earlier this month concluded that “increases in interest rate risk premiums as a result of debt concerns can render fiscal multipliers negative, suggesting that discretionary fiscal stimulus may do more harm than good.” Put another way, there’s no point pumping more government money in one end of the economy if it delays the lower interest rates that will stimulate private sector activity at the other end.

There’s another reason for fiscal responsibility in a recession.

If you don’t keep control of public finances, you risk saddling your economy with so much debt that it stifles the recovery for many years to come.

That is not a rock of stability. It is more like a ball and chain.

So everyone needs to understand the true weakness of our fiscal position under Labour.

“The speed with which the political debate already is turning to fiscal loosening raises risks that the overall fiscal loosening in the recession and pre-election period will be so big that the fiscal deficit itself will become a destabilising factor for the economy in coming years.” In other words, that Gordon Brown’s desire to spend his way out of the recession will not only make the recession worse, it will undermine the recovery too.

This is not some argument about economic theory.

This is about real lives, real jobs, real homes.

The risky consequences of irresponsibility are not merely a theoretical possibility, they are happening all around us.

The citizens of Ukraine, Hungary and Pakistan are now learning what happens when the markets lose confidence in a whole country.

Their sources of external financing that appeared to be reliable have dried up with astonishing speed.

Several countries in Eastern Europe, Asia and Latin America now risk a repeat of the Asian financial crisis of the late 1990s.

At the moment these problems are limited to emerging markets, but given the remarkable events of recent weeks we cannot be certain they will remain so.

The Governor of the Bank of England himself has highlighted Britain’s unusual dependence on external finance.

The coverage of Mervyn King’s speech last week was dominated by his use of the “R” word, but in a sobering passage he noted that “those external inflows have fallen sharply – a mild form of the reversal of capital inflows experienced by a number of emerging market economies in the 1990s.” That is an extraordinary parallel for the Governor of the Bank of England to have to make.





Even more sobering was the warning that followed: “Unless they are replaced by other forms of external finance, the adjustments in the trade deficit and exchange rate will need to be larger and faster than would otherwise have occurred, implying a larger rise in domestic saving and weaker domestic spending in the short run.” Rising domestic saving and weak domestic spending are central banker’s code for a severe and lasting recession.

Most of these capital inflows have been used to finance private sector borrowing, but the same dangers now apply to government borrowing.

In the fourteen quarters from the beginning of 2005 to the middle of this year, overseas investors bought three quarters of total net UK gilt issuance.

But the head of one fund has already warned that the Treasury can no longer take it for granted that foreign buyers will turn up at bond auctions: “We are nearing the point where Asian and Middle East investors are going to charge a much higher premium for holding British sovereign debt. Once a government loses credibility, these investment shifts can happen with alarming speed.” Already the spread on credit default insurance for UK Government debt has widened from almost zero a year ago to 60 basis points today.

That’s 50% higher than for French debt and twice as high as for German debt.

And there’s another vital reason why we must resist spending splurges and irresponsible borrowing.

An IMF survey published earlier this month concluded that “increases in interest rate risk premiums as a result of debt concerns can render fiscal multipliers negative, suggesting that discretionary fiscal stimulus may do more harm than good.” Put another way, there’s no point pumping more government money in one end of the economy if it delays the lower interest rates that will stimulate private sector activity at the other end.

There’s another reason for fiscal responsibility in a recession.

If you don’t keep control of public finances, you risk saddling your economy with so much debt that it stifles the recovery for many years to come.

That is not a rock of stability. It is more like a ball and chain.

So everyone needs to understand the true weakness of our fiscal position under Labour.

“The speed with which the political debate already is turning to fiscal loosening raises risks that the overall fiscal loosening in the recession and pre-election period will be so big that the fiscal deficit itself will become a destabilising factor for the economy in coming years.” In other words, that Gordon Brown’s desire to spend his way out of the recession will not only make the recession worse, it will undermine the recovery too.

This is not some argument about economic theory.

This is about real lives, real jobs, real homes.

The risky consequences of irresponsibility are not merely a theoretical possibility, they are happening all around us.

The citizens of Ukraine, Hungary and Pakistan are now learning what happens when the markets lose confidence in a whole country.

Their sources of external financing that appeared to be reliable have dried up with astonishing speed.

Several countries in Eastern Europe, Asia and Latin America now risk a repeat of the Asian financial crisis of the late 1990s.

At the moment these problems are limited to emerging markets, but given the remarkable events of recent weeks we cannot be certain they will remain so.

The Governor of the Bank of England himself has highlighted Britain’s unusual dependence on external finance.

The coverage of Mervyn King’s speech last week was dominated by his use of the “R” word, but in a sobering passage he noted that “those external inflows have fallen sharply – a mild form of the reversal of capital inflows experienced by a number of emerging market economies in the 1990s.” That is an extraordinary parallel for the Governor of the Bank of England to have to make.

Even more sobering was the warning that followed: “Unless they are replaced by other forms of external finance, the adjustments in the trade deficit and exchange rate will need to be larger and faster than would otherwise have occurred, implying a larger rise in domestic saving and weaker domestic spending in the short run.” Rising domestic saving and weak domestic spending are central banker’s code for a severe and lasting recession.

Most of these capital inflows have been used to finance private sector borrowing, but the same dangers now apply to government borrowing.

In the fourteen quarters from the beginning of 2005 to the middle of this year, overseas investors bought three quarters of total net UK gilt issuance.



Pages:     | 1 |   ...   | 2 | 3 || 5 | 6 |   ...   | 7 |


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