Thursday, February 25, 2010

Better George


No time for a proper blog today, but Tyler has just read George's Mais Lecture. Overall, it's rather encouraging - in fact, Tyler almost feels he could have written long passages himself.

True, we have heard much of it before, but he leaves us in no doubt that he sees the rapid build-up in government debt as being a much more significant threat to continued growth than early cuts in public spending. Specifically disagreeing with the left-wing economics establishment, he says:
"A credible plan is not really credible unless you're prepared to make a start on it this year.

Otherwise we are trying to persuade people that we will be virtuous, just not yet - and when you've been as irresponsible as Britain has been, that isn't easy.
That is my hard-headed assessment.
And it is driven by three things:
The nature of confidence; the realities of financial markets; and the practicalities of government."
And on the dangers of debt, George highlights some scary projections recently published by the Bank for International Settlements. They reckon that on current policies, the UK public sector has the worst fiscal outlook of any major economy.

In particular, the BIS homes in on the interest costs of our debt build-up - the key issue we have to worry about. They forecast that by 2025 public sector debt interest payments will have increased from the current 3% of GDP up to around 15%. And by 2040 it will be a bed-wetting 30% - three times the level that nearly triggered a revolution in the aftermath of the Napoleonic Wars (see this blog). Here's their chart (public sector debt interest as % of GDP):


Tyler is somewhat reassured by this speech. It is a weightier offering than the kind of politicking stuff George has sometimes served up in the past. It may not have quantified targets for spending cuts, and we still need to see him adopt clear fiscal rules - including that all-important third rule to govern spending - but this speech does have the makings of a serious plan for government (and see the TPA view here).

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