Hamish McRae: Chancellors are supposed to be hated – it's part of their job

The general squeeze will not relent. Finance ministers will be unpopular

Hamish McRae
Tuesday 04 September 2012 20:21
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We should be almost relieved that George Osborne gets booed
We should be almost relieved that George Osborne gets booed

Some good news: the Chancellor was booed at the Paralympics. It is good news not because I feel any particular antipathy towards George Osborne, but rather because we will have to get used to politicians who are unpopular. Indeed, we need them. And that goes not just for Britain but for just about every developed country in the world.

The reason is not masochism but mathematics, which have flipped without most of us realising it. The maths of public finance have, for most of the post-Second World War period, been favourable for a number of reasons. One is demography: each generation of people of working age has been larger than the previous one. Another is growth: for two generations there has been solid economic growth in most Western democracies. A third is the borrowing capacity of the modern state: most countries have institutional arrangements enabling them to borrow at very low rates of interest, sometimes even negative ones in real terms.

As a result, we have had a generation of politicians which can say "yes" because, sooner or later, the money has been available to do things. And we have a generation of voters which expects as much.

Those favourable forces have, to a large extent, now gone into reverse. Most European countries (though not the UK) face a shrinking workforce, so a smaller number of workers have to fund a larger number of retirees. Raising the retirement age helps a bit but, in many countries, to get the balance between working and retired back to the level of 20 years ago people would have to work until 70 or more.

Growth cannot be assumed. Half of Europe is now in recession and even those of us who believe that, contrary to the official statistics, the UK economy is still growing a bit would acknowledge that the expansion is disappointingly slow.

As for borrowing capacity, several large and successful countries, such as Italy and Spain, can barely borrow at all – certainly not at an acceptable interest rate. (People in Britain can borrow for a mortgage at about two-thirds the rate the Italian state has to pay.)

The situation varies from country to country. Even relatively strong states have problems. Germany has some growth and can borrow very cheaply, but has particularly unfavourable demographics. We have a particularly large deficit but can also borrow very cheaply – though it is not clear to what extent that is simply the result of the Bank of England being able to print the money. The US is in much the same position, although perhaps has somewhat stronger growth.

The big point here, though, is that these pressures will continue for another 30 years or more. It may not be the "slash spending on just about everything" evident now in Spain and Italy, but the general squeeze will not relent. Finance ministers will inevitably be unpopular, which is why we should be almost relieved that Osborne gets booed. To pretend that there is some sort of alternative, as the Opposition seems to do, is a cruel misapprehension. My guess is that if Labour were to get into power at the next election, they would have to cut the country's deficit faster than the present lot because their borrowing capacity would be more constrained.

It is important, though, not to think of this pressure on public finances in national terms. We are all, throughout the developed world, in this together. We have all in some measure lived beyond our means and, accordingly, we all have to seek ways of running our societies more efficiently. If that means unpopular politicians, so be it.

Is the ECB about to swing into action?

The European Central Bank council meeting tomorrow takes on a special significance in that it is widely expected to commit the ECB to supporting weaker eurozone countries by buying their sovereign debt. It might, despite statutes prohibiting the buying of countries' bonds, still be able to purchase short-term debt. Whatever the legal position, were it to do so that would be within accepted central bank practice, which is that the bank has a duty to maintain orderly markets.

The run-up to the meeting has been characterised by a string of leaks, hints and statements from various players. The statement I found most interesting was that from Jörg Asmussen, one of the two German members of the ECB board, saying it was unacceptable that the markets should be pricing in not just sovereign risk but the possibility of eurozone break-up. "For a currency union, such systemic doubts are not acceptable," he added.

Mr Asmussen thus provides an intellectual defence for the ECB to buy sovereign debt. It would not just be supporting a weak government. It would be countering systemic risk. But there is a problem with that line of argument. If Greece were indeed to leave the union, it would be utterly rational to have "systemic doubts" about the other Club Med members.

h.mcrae@independent.co.uk

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