Originally published January 2013.
As has been frequently stated by opponents of the Coalition's program of austerity and by the more reasoned economic commentators the reason Gilt yields touched historic lows since May 2010 has had little if anything to do with fiscal consolidation and the Government's 'hard-won credibility'. The notion that any other course of action would put this at risk (the line constantly trotted out at PMQs etc) is entirely mistaken.
The 3 factors keeping Gilt yields low since the Coalition took office have been:
i) The BOE's program of QE
ii) The lack of economic growth
iii) The lack of a lender of last resort for the Euro area
The first because BOE demand for Gilts drives yields down (few if any other buyers have increased their holdings to the extent the BOE has), and the second because the demand for gilts by investors increases in a low growth environment when there is little investment activity by firms and increased risk in corporate bonds. The idea that the Coalition's fiscal consolidation is the reason yields have stayed low is fanciful to say the least, and doesn't bear scrutiny.
The Coalition has staked its reputation on Gilt yields staying low, and we are now seeing that strategy beginning to unravel as prices start to fall. This was a catastrophic misjudgement by Cameron, but he only has himself to blame - he consistently misrepresented the scale of the UK's economic problems at the last election, and since, to gain cover for his fiscal assault. To compare the 6th largest economy in the world (with the lowest net debt to GDP in the G20) to a bankrupt Greece was infantile.
Since QE was halted in November and the lender of last resort issue was resolved for the Euro (enabling investors who had been avoiding Euro-area sovereigns to return) yields have begun to rise - 10-year yields are at a 9-month high and are forecast to continue rising. Add to this the fact that the lack of growth in the UK economy will likely lead to a credit rating downgrade before the summer and you can see that Cameron's 'hard-won credibility' is really nothing of the sort and fiscal consolidation is irrelevant.
Cameron and Osborne are now playing down the significance of an agency downgrade, stating that is it the verdict of the markets that is the true measure by which they should be judged. Well the markets are forming their verdict and I suspect it will be damning.
I look forward to seeing how Cameron explains this away. At some point he will resort back to blaming Labour again for 'the mess we inherited' or for 'talking down the economy' (don't laugh - he's serious). In reality he can only blame himself - his analysis and speech-making since 2010 has been economically illiterate and has destroyed animal spirits. He has relied upon sloganeering ('maxed-out our credit card', 'deficit-deniers', etc) as cover for his political mission to hack back the State. But you can only pull the wool over the eyes of the people for so long - I think we are reaching a turning point and realisation will soon begin to dawn. At that point Labour will need to move on from opposition and holding to account, to presenting a credible alternative and a coherent strategy for growth.
As has been frequently stated by opponents of the Coalition's program of austerity and by the more reasoned economic commentators the reason Gilt yields touched historic lows since May 2010 has had little if anything to do with fiscal consolidation and the Government's 'hard-won credibility'. The notion that any other course of action would put this at risk (the line constantly trotted out at PMQs etc) is entirely mistaken.
The 3 factors keeping Gilt yields low since the Coalition took office have been:
i) The BOE's program of QE
ii) The lack of economic growth
iii) The lack of a lender of last resort for the Euro area
The first because BOE demand for Gilts drives yields down (few if any other buyers have increased their holdings to the extent the BOE has), and the second because the demand for gilts by investors increases in a low growth environment when there is little investment activity by firms and increased risk in corporate bonds. The idea that the Coalition's fiscal consolidation is the reason yields have stayed low is fanciful to say the least, and doesn't bear scrutiny.
The Coalition has staked its reputation on Gilt yields staying low, and we are now seeing that strategy beginning to unravel as prices start to fall. This was a catastrophic misjudgement by Cameron, but he only has himself to blame - he consistently misrepresented the scale of the UK's economic problems at the last election, and since, to gain cover for his fiscal assault. To compare the 6th largest economy in the world (with the lowest net debt to GDP in the G20) to a bankrupt Greece was infantile.
Since QE was halted in November and the lender of last resort issue was resolved for the Euro (enabling investors who had been avoiding Euro-area sovereigns to return) yields have begun to rise - 10-year yields are at a 9-month high and are forecast to continue rising. Add to this the fact that the lack of growth in the UK economy will likely lead to a credit rating downgrade before the summer and you can see that Cameron's 'hard-won credibility' is really nothing of the sort and fiscal consolidation is irrelevant.
Cameron and Osborne are now playing down the significance of an agency downgrade, stating that is it the verdict of the markets that is the true measure by which they should be judged. Well the markets are forming their verdict and I suspect it will be damning.
I look forward to seeing how Cameron explains this away. At some point he will resort back to blaming Labour again for 'the mess we inherited' or for 'talking down the economy' (don't laugh - he's serious). In reality he can only blame himself - his analysis and speech-making since 2010 has been economically illiterate and has destroyed animal spirits. He has relied upon sloganeering ('maxed-out our credit card', 'deficit-deniers', etc) as cover for his political mission to hack back the State. But you can only pull the wool over the eyes of the people for so long - I think we are reaching a turning point and realisation will soon begin to dawn. At that point Labour will need to move on from opposition and holding to account, to presenting a credible alternative and a coherent strategy for growth.