Ben Chu: Why no flexibility? It's the markets, stupid, says George

 

Click to follow
The Independent Online

The Treasury won't countenance a "Plan B" on deficit reduction in response to slowing growth. Even a "Plan A-plus", as floated by some of the Coalition's increasingly nervous supporters, is apparently out of the question.

George Osborne says the reason is economics. He argues that if the Government were to start backing away from the cast-iron commitment he made last June to wipe out the UK's structural deficit, the financial markets will dump British government debt, pushing up interest rates and extinguishing the economic recovery entirely.

So would investors really panic if there was a change of policy, perhaps with some infrastructure projects brought forward to support growth in the near term? It's certainly a risk. Markets are perfectly capable of dumping debt if they think politicians lack the political will to sort out their public finances.

But the question is: how significant is this risk? The signs are that investors regard UK government debt as a safe haven in a hostile world. This is not just because of the Chancellor's ambitious deficit reduction strategy, but because Britain has a strong record of paying back its debts.

The fact that we are not locked into the single currency and are able to devalue our currency also helps our ability to generate growth, in the eyes of investors. The likelihood is that a bit of flexibility in deficit reduction now would not result in the economic sky falling in on Britain.

The truth is that there's also a large element of politics in the Treasury's resistance to easing the pace of deficit reduction. It would be a tremendous embarrassment for Mr Osborne to have to admit that his political opponents were right and that the bold plan he laid out last June was simply not flexible enough.

Comments