Friday, July 18, 2008
My Gaff, My Rules
I don't know if I've mentioned this before, but here's a piece of advice - never ever trust politicians. And especially never trust them with your money.
Last night we learned that Gordo is plotting to dump his famous fiscal rules. Despite a decade of preening about prudence and sustainability, it turns out they're actually only fair weather rules, and their gold is the same stuff Gerald Ratner used to coat his prawn sandwich earrings.
The whole point about fiscal rules is that they stop politicos spending our money willy-nilly. They impose the discipline politicians lack when the going gets tough. They are there to bite, not to be junked in the face of electoral melt-down.
Regular BOM readers will know we're big fans of fiscal rules - indeed, we want to add that third rule limiting government spending directly (eg see this blog). As the OECD's research confirms, when it comes to containing fiscal excess, clear upfront rules trump unfettered political discretion every time.
And Labour governments really do always end like this. Vast overspending, taxes pushed beyond the limits of acceptability, borrowing maxxed, and economic problems left ungripped. But at least last time they were constrained by that humiliating IMF bailout to rescue the Pound: the IMF loan conditions provided Callaghan with the backbone necessary to resist pressure from his Bennite colleagues for even more spending (eg see Goodbye Great Britain: The 1976 IMF Crisis).
This time there is no such constraint. Gordo's rules are no more than what he says they are. They have no substance or authority beyond that. Nobody is going to impose sanctions if he fails to deliver.
Well, nobody that is, except the financial markets. And they've already taken the message firmly on board. In the last year, the Pound has taken a whack (eg down 15% against the Euro, and even down against the beleaguered dollar) as confidence has slumped. We hear about the collapsing equity market every night in gleeful BBC reports, and before long, rising inflation will likely start to push up the government's own cost of borrowing (right now gilts are still benefiting from "safe haven" status as the equity roof falls in - hence the return of a yield gap between the dividend yield on equities and the yield on gilts).
So there will be a price. Which we will pay in the higher cost of imported goods, and probably higher interest rates. Not forgetting of course, the further mountain of debt Gordo will run up when he boosts borrowing. As he's clearly going to.
Who voted for these lying pillocks again?
PS There is an even scarier scenario out there: the one in which Gordo not only abandons his fiscal rules, but also changes the Bank of England's monetary policy mandate to include economic growth. We blogged this possibility last month after Tyler's lunch on the Hill with Huggy (who just knows about these things). Making the Bank take account of sagging growth in setting interest rates would take us straight back to the 70s. Higher inflation would become embedded and we'd be off on that traditional wage-price spiral. Higher inflation, soggy growth, ballooning government debt, monetary melt-down, collapsing pound, even higher inflation, even soggier growth, even more ballooning... arrggh!