Monday, February 14, 2011

Pulling away from the fiscal precipice

The last couple of days, I've been raging about inflation. This is partly in anticipation of this week's Inflation Report. Doubtless, the report will contain the usual incoherence that we have come to expect from the Bank of England.

On fiscal policy, I have been more muted of late. I am quietly hopeful that the coalition's fiscal consolidation plans will pull us from the precipice. Perhaps I'm being too blinkered, but I really don't care one way or another about David Cameron's disappointment in multiculturalism or his vision of the big society. For me, if he manages to save us from fiscal disaster, then he has my support.

Gordon Brown would have had that support too, if he had been more true to his earlier rhetoric of prudence and an end to boom and bust. Personally, I don't much care for political parties, but I care passionately about policies.

Large, unsustainable fiscal deficits are frightening. They always represent a victory of short-term political expediency over the long term needs of the nation. deficits are about pandering to the electorate without considering the long-term implications of irresponsible fiscal policies.No sensible person would blow all their savings or accumulate huge debts in a mad frenzy of spending. The same is true of the governments.

Any government that continues run up large deficits and accumulate debts will sooner or later reach the threshold when it can no longer borrow. When that point is reached, the adjustment back to fiscal balance will be violent and disorderly. The expenditure cuts will be brutal, with little consideration for the usual niceties such as protecting the poor and maintaining key public services such as health and education.

This is why I find all this whining about the coalitions expenditure cuts so irritating. Of course they will be painful, but it is better to administer these difficult decisions while financial markets are still willing to keep credit lines open.

1 comment:

  1. It seems to me that there is an inherent confusion at the very centre of economic and fiscal policy. The monetary committee seems to have lost sight of its only purpose - to use interest rates to control inflation. That, and that alone, was the reason for its existence. Now King seems to want to fine tune the whole economy which is not his job. As it happens I think a rise in interest rates would not be very helpful to the economy just now but if he had stuck to his guns then Osborne might have had to think twice before putting up VAT.