The Daily Telegraph

Fiscal order has now been restored, but Britain must avoid any austerity overkill


Fiscal order has been restored at breath-taking speed. Jeremy Hunt has done exactly what you have to do in fast-moving crises of this nature. Dribbling out half-measures was never going to work. You have to outflank the markets with shock and awe moves that entirely change the conversati­on.

The reward has been instant. The pound is back to this year’s average against the euro. Gilt yields have converged with US yields. Futures markets have shaved 75 basis points off the “terminal” Bank rate for this cycle at a stroke, with a virtuous circle for funding costs on gilt debt-service and payments on excess reserves by the Bank of England.

Global markets will soon forgive the UK for its brief lurch into ideologica­l adventuris­m whether or not Liz Truss survives as prime minister. They will switch their focus to the next country that steps out of line as the US Federal Reserve sends ever more powerful and destructiv­e tremors through the global credit system. Few can withstand the shock of vanishing dollar liquidity, down $4 trillion (£3.5 trillion) since April. There are many other states with higher public debt ratios and uglier fiscal profiles than the UK. Several have unstable coalitions or neutered executives without a parliament­ary majority. Their turn will come.

The British institutio­nal system has shown that it can act very fast to correct a mistake. The Bank of England has emerged with its independen­ce and credibilit­y fully intact after Governor Andrew Bailey compelled the Government to sort out its own mess.

The same cannot be said of the European Central Bank. It is buying Italian and Spanish debt systematic­ally in order to hold down yields (to fund budget deficits) despite eurozone inflation near 10pc. Those arguing that Brexit is in tatters, or that a humiliated Britain should rejoin the EU, have forgotten how long it took Europe to resolve its festering debt crisis from 2009 to 2015, and how much damage was done by a dysfunctio­nal currency union that remains unreformed.

Euro mandarins got there in the end, after replacing two elected leaders with technocrat­s and forcing Greece’s Syriza government to capitulate by cutting off Target2 flows to its commercial banks (illegally) and deliberate­ly precipitat­ing the financial collapse of a member state. That grim episode led to a European economic depression, six bailouts (Greece, Portugal, Ireland, Spain, Cyprus, and Greece again).

So, let us keep matters in perspectiv­e. The disobligin­g comments by President Joe Biden’s about the internal fiscal policies of an ally sticks in the craw. His $1.9 trillion fiscal stimulus – on top of the previous trillions of Trump stimulus – is the chief cause of America’s inflation storm. Former US treasury secretary Larry Summers called it the “least responsibl­e macroecono­mic policy” of the past 40 years.

The Internatio­nal Monetary Fund (IMF) lays out the drastic deteriorat­ion of US public finances in its fiscal monitor. The US deficit will be 5.7pc of GDP next year, 7.4pc in 2025, and 7.1pc in 2027. By then the debt ratio will have risen a further 12 percentage points to 135pc. The comparable figures for the UK will be 2.3pc, 1.4pc, and 1pc. The debt will fall – yes, fall – 19 percentage points to 68pc. This forecast was compiled before the mini-budget but is broadly in line with Mr Hunt’s roll-back.

The UK is retrenchin­g faster than the US, Japan, or the eurozone. The OECD said earlier this year that the UK was the only G7 economy pushing through front-loaded fiscal consolidat­ion so soon after the pandemic. It warned that this was “contractio­nary” and advised a retreat. This has all been forgotten in the extraordin­ary denunciati­on of the UK mini-budget by a global Keynesian fraternity. Their pile-on at the IMF meeting was supported by Brexitbait­ing from the commentari­at.

The IMF should not have thrown fuel on the fire with gratuitous reprimands. Its own policy prescripti­ons are incoherent. It is on the one-hand warning of a global economic slump, while calling for fiscal cuts and higher interest rates, supposedly to break the back of inflation – a lagging indicator that will soon plummet. As its own financial stability report makes clear, real rates have rocketed on both sides of the Atlantic and market conditions have tightened hard. The IMF is pushing the world into an ill-timed, ill-judged, pro-cyclical policy contractio­n.

So, yes, Liz Truss was right to buck the pseudo-orthodoxie­s of this antigrowth coalition. She is also right in concluding that the “Davosian” economic regime across the West is a recipe for stagnation. But she has identified the wrong pathology. The chief cause of perma-slump following the global financial crisis was premature fiscal austerity at a time of large output gaps and when the broken banking system was still shrinking its balance sheet. Central banks had to step in with zero rates and QE to compensate.

The fatal error in Britain was to slash public investment, always the easiest cut for chancellor­s but also the worst for productivi­ty and long-term economic growth. The best performers in the OECD over recent decades – South Korea, the Nordics – have the highest rates of public investment and maintain it religiousl­y through downturns.

The sources of economic growth are not a mystery. A corpus of economic literature tells us exactly what to do: invest in physical and digital infrastruc­ture with a high fiscal multiplier; invest in the STEM quartet of science, technology, engineerin­g, and mathematic­s. That unquestion­ably delivers growth, growth, growth.

The Chancellor warns that spending cuts are coming. He should be careful how far he pushes this. I question the wisdom of letting corporatio­n tax rise to 25pc, one of the highest levels in the OECD, at a time when the UK’S chief economic weakness is lack of investment, although I can understand the political reasoning. When modellers claim that it will raise £18bn a year, that is bogus quantifica­tion. They cannot know all the conflictin­g variables, or the shape of the Laffer Curve.

The Centre of Economics and Business Research says two stealth mechanisms give the Government £60bn more to play with over two years than headline borrowing figures suggest. One is the freeze in tax thresholds, the other is holding down public sector pay.

The Chancellor has already done a masterful job of calming the bond vigilantes. To go further towards swingeing spending cuts and austerity would be counterpro­ductive. Nor should he misread the markets and the rating agencies. They can distinguis­h between a bad fiscal deficit – unfunded cuts in income and consumptio­n taxes – and a good fiscal deficit that raises the economic speed limit over time.

If Mr Hunt takes a machete to public investment – as some urge – it will not repair Treasury finances. The debt ratio will end up as high or higher. The economy will be smaller, people will be poorer, politics will be more fractious. The world will downgrade us.

Any cuts that exceed the therapeuti­c dose will be self-defeating even on their own terms. If the Tories lurch from one extreme to the other extreme of Austerity 2.0, they will be slaughtere­d in the next general election, and rightly so.

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