Business Secretary Vince Cable writes today at the Financial Times on the Coalition Government’s approach to deficit reduction, in response to the International Monetary Fund’s endorsement.
He explores the reasons for the financial crisis and its legacy, and suggests,
The only sensible macro-economic policy stance is a tight fiscal policy combined with a loose monetary one: Plan A.
He concludes:
Co-operation between the coalition partners remains vital for the good of the economy. While there is much common ground there are differences of emphasis. Liberal Democrats prioritise radical banking reform, progressive taxation and the green economy. Conservatives set greater store by corporate tax cuts and labour market reform. We agree on the need for more house-building, which will push down prices, but we have long argued that the boom-bust cycle in property will remain unaddressed until we develop a more economically rational and progressive approach to taxation.
If the coalition can carry through our economic agenda – converting a hospital pass into a try – it will be a remarkable achievement.
Read the whole article at FT.com.
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7 Comments
Yes, that was worth registering on the FT for.
The relationship between fiscal and monetary policy is worth emphasising. When combined policy is too loose, attempting stimulus beyond the capacity of the economy to grow, inflation is the result.
Now if and when the Bank of England decides that rates must go up to curb inflation, this will be a step that could perhaps have been averted or at least delayed by a tighter fiscal policy.
Those on the left demanding more borrowing, thinking to get more debt and growth, may just get debt and inflation. Or debt and higher interest rates.
“…we have long argued that the boom-bust cycle in property will remain unaddressed until we develop a more economically rational and progressive approach to taxation.”
Absolutely; Land Value Tax..
I have a lot of time for Vince, but this headline is appalling. “We agree to differ on restoring economy”, sadly sounds like a nice man on the outside saying “We don’t like what George is doing, so we just let him get on with it. Indeed we provide the support to ensure his party has a majority.” Labour will use this to hammer us even more.
Another example of a stitch up by the media, or very shoddy work by political advisors?
I do not think Vince is con-vince ‘d at all by his own arguments.
First, he knows only too well the IMF made clear the defecit reduction plan is only sustainable at the current speed by taxation increase and this means without this plan A will crash the economy! A point too few commentators were prepared to address.
Second, he knows there is no justification for taking the approach Osborne leads, market stability questions or otherwise. Credit agencies I recall, were only two years ago rating countries with triple AAA stars etc despite severe economic difficulty and they continue to have contradictory and misleading positions on many countries (France for example with a higher structural defecit than ours and still triple AAA rated and with a conservative finance minister having made no significant moves to reduce the defecit and a potential IMF Chief also). The unplalatable wrong Vince and Osborne will find is the markets judgement should not direct fiscal policy and it should not be an argument to put fear into the wider economy. Credit agencies and the market are too damaged to trust.
And if the institutional leaders, journalists, politicians etc are impotent in saying so, get this! I can tell you the economy will remain stagnant with the very real possibility of recession, unemployment will increase, inflation continue and co-joined against damaging social policy the damage to the country will be critical, and the talk of 2012 onwards etc as seeing a rebalanced economy with an improving society is pure wishful thinking.
Vince’s analysis of the country’s economic problems and what the government can and cannot do remains entirely convincing. A refutation of the so-called Keynesians. We can’t use fiscal policy to bounce back, because there there is nothing to bounce back to. the economy is in a slow process of realignment.
Unfortunately, the conventional macro-economic policy of loose monetary policy is completely ineffective. But isn’t much we can do about that.
Conventional macro of low rates has given a huge gain in disposable income to many households with mortgages and businesses with floating-rate debts. This is unquestionably helped them deleverage, as expected and desired.
Risk asset prices (equities, commercial property, corporate bonds, as notable examples) have grown extremely strongly since the beginning of QE (“unconventional” macro), indicating a rebound in expectations of economic growth – indeed, corporate earnings have not disappointed.
Nominal GDP has grown at 5.5% over the last four quarters – bang on the pre-crisis trend rate. Yes, too much of this is accounted for by inflation but inflation is volatile, and high inflation is not an indicator of low aggregate demand.
Scott Sumner is required reading for anybody who misunderstands the current state of the UK economy.
http://www.themoneyillusion.com/?p=8937
also Simon Ward for a more conventional monetarist take:
http://www.moneymovesmarkets.com/journal/2011/5/27/uk-consumers-defy-mpc-consensus-gloom.html
http://www.moneymovesmarkets.com/journal/2011/6/13/creditist-plan-b-misguided-risking-economic-distortions.html
Liberal Democrats prioritise radical banking reform, progressive taxation and the green economy
I have no idea what effects banking reform or progressive taxation have on the economy, but “the green economy” is politician-speak for high energy prices. He can demand them if he likes, but he should admit that they will do nothing for the economy but harm it.