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Osborne’s debt dilemma

8 August 2011

1:11 PM

8 August 2011

1:11 PM

If there’s one sentiment that defines George Osborne’s article for the Telegraph today, it’s that there is no
need for us Brits to panic. The economic convulsions of the past few days, contends the Chancellor, serve to prove that the coalition was right to approach deficit reduction as it has. "The
alternative of more spending and yet more borrowing is now frankly ludicrous," he says, "and places those who advocate it on the outer fringes of the international debate."

He has a point. As I blogged on
Saturday
, there are reasons to believe that we’d be hurtling towards a credit downgrade and higher borrowing costs were it not for the fact that our debt-GDP ratio is set to decline by 2015.
Based on Standard and Poor’s analysis of America’s debt, Osborne’s new fiscal rule, "to ensure that debt is falling as a share of
GDP by 2015-16
", is looking even shrewder today than when he announced it in his first Budget.


But Osborne’s swagger is not without risk. As it stands, our debt-GDP ratio will be 70.9 per cent in 2013-15, 70.5 per cent in 2014-15, and 69.1 per cent in 2015-16. Which is to say, we’re but a
few growth and revenue downgrades away from that gentle downwards slope becoming a gentle upwards one. And that’s not an unimaginable prospect with the world economy as diseased and corrupted as it
is.

Of course, were that to happen, the Chancellor would certainly cut spending even further, to ensure that his fiscal rule is met. Yet that is hardly helpful to him, reducing the space for
pre-election tax cuts as it would. And it may not even keep the credit rating agencies at bay. If they sense that the debt target is unlikely to be met, then a downgrade may follow regardless of
what Osborne has secreted away in his Red Box.

Little wonder, then, why Osborne also uses his Telegraph article to plead for sanity in the Eurozone, lest their fiscal problems lap at our shores. The Chancellor has hardened his rhetoric towards the single currency states in recent weeks,
but, as Benedict Brogan notes, this goes much further in urging
them towards fiscal unity:

"First, countries must demonstrate that they have credible plans to deal with excessive deficits, improve competitiveness and strengthen banking systems. In this respect, Britain’s
experience contains an invaluable lesson: it is possible to earn credibility and get ahead of the markets through decisive action. But by its nature a global crisis cannot be solved by countries
acting alone. Eurozone countries must now act swiftly to deliver on what they have promised. Euro area institutions need to do whatever is necessary to ensure financial stability, as I am sure
they will.

However, this can only ever be a bridge to a permanent solution. As I’ve said, the eurozone countries need to accept the remorseless logic of monetary union that leads from a single currency
to greater fiscal integration. Solutions such as euro bonds now require serious consideration if investors are to be convinced about the long-term future of the currency. A disorderly outcome
would be disastrous for everyone, including Britain, so we should allow greater integration to happen, while ensuring we are not part of it and our own national interests are protected. Beyond
Europe, we must encourage creditor countries to expand demand and debtor countries to make the painful adjustments necessary to repay them."

I can’t imagine countries like Germany ceding their fiscal sovereignty to Brussels, and all because of aberrations such as Greece, Italy and Spain. But, were they to do so, it would certainly
create room for Osborne and Cameron to renegotiate Britain’s own relationship with Europe. A tighter Eurozone could, in the end, mean a looser EU.

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