Wolf on King

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I spoke at the TUC this week.

So did Mervyn King. He got more press! No surprise there then.

But apart from endorsing arguments for tackling the tax gap, was what King said right? Martin Wolf does not think so in the FT today:

What is the core of Mr King’s argument? It is that “market reaction to rising sovereign debt can turn quickly from benign to malign ... It is not sensible to risk a damaging rise in long-term interest rates that would make investment and the cost of mortgages more expensive. The current plan is to reduce the deficit steadily over five years — a more gradual fiscal tightening than in some other countries. As a result of a failure to put such a plan in place sooner, some euro-area countries have found — to their cost — a much more rapid adjustment being forced upon them.”

I have argued before that the UK is in a very different position from, say, Greece: it has a far lower ratio of debt to gross domestic product; it borrows in its own currency; it has the means to promote its own recovery, which is vital for managing public debt; it has a modest current account deficit; it has a history of managing its public debt well; and current indebtedness is lower, relative to GDP, than the average of the past three centuries. Markets have also been remarkably relaxed about funding these deficits: interest rates on index-linked gilts have been 1 per cent, or less, for more than a year; the yield on 10-year gilts has remained below pre-crisis levels and is now close to 3 per cent; and spreads over German bunds have been 1 percentage point, or less, throughout the crisis.

As others — Paul Krugman, Larry Elliott and many more — argue — King’s argument is we must be in fear of markets and yet those markets persistently show we have nothing to be afraid of.

So why are we living in fear of a threat that does not exist?

The threat to markets in this country is not from government debt — it’s from recession — recession caused by government cuts.

King was wrong before the crash.

He’s wrong now.

He and Osborne are fighting phantoms. That’s not the basis for an economic policy.

This is.

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