Tim Congdon: vicious fiscal consolidation doesn't need to kill UK growth
Congdon, in the back row on the far right, advised former Conservative Chancellor Ken Clarke
Here’s just a taste of his remarks. The Keynesian idea that you can raise economic activity by increasing the Budget deficit is just a load of “tripe”. The sooner everyone realises this and gets back to balanced budgets so that vast amounts of public money aren’t wasted on ever more desperately servicing the national debt, the better.
Despite quantitative easing, inflation is no kind of a concern for the medium term, forcing higher capital ratios on banks right now is counter-productive nonsense, and vicious cuts in the deficit are perfectly compatible with above trend growth.
I also quite like the idea that it is not the size of the national debt as such we need to worry about, but only the cost to the nation of servicing it. The bigger the national debt is, the more it costs to service and the more tax revenue that has to be wastefully expended simply on paying debt interest. But the idea that the country as a whole can become insolvent is in Mr Congdon’s view ridiculous, since an economy can only lend to itself what it already pocesses. The construct is like a hall of mirrors. OK, so quite esoteric stuff, perhaps, but an intriguing thought none the less.
The reason Congdon is so confident that you can indeed have fiscal consolidation with decent growth is because it has been done before in the early 1980s. Both he and Sir Alan Budd, chairman of the Government’s new Office of Budget Responsibility were advising the UK Government at the time, so both know that it is perfectly feasible.
But it needs monetary policy to be hospitable. And here we reach the heart of Professor Congdon’s contention. Stop worrying about inflation, stop worrying about banking capital ratios, or whether banks are providing sufficient credit to the economy, and stop worrying too about the effect on demand of cutting the deficit. The only important thing is that money supply expands at a rate compatible with the desired level of nominal GDP growth, or around 5-6 per cent.
Thanks to quantitative easing, which in Congdon’s view should have been applied far earlier to address the previous contraction in money, that’s now occurring. Public policy should always aim for expansion in deposits roughly in line with the desired level of nominal GDP growth.
In the run up to the crisis, it was growing at a much faster clip, which should have set alarm bells ringing but was widely ignored. Just keeping it steady and stable is what we should be aiming at. Well I guess we are about to find out if he’s right.
A big fiscal squeeze is about to be applied against the backdrop of still fragile economic growth. But in Congdon’s view, it will be fine provided the Bank of England can keep deposits growing at 5 per cent or so. We’ll see, but I’m as suspicious as him about the Keynesian justification used by the last Labour Government for keeping the fiscal stimulus at full tilt.
Never mind the ruinous costs to the public finances, I’m not at all sure Keynes would have agreed that spend until interest rates soar was the best approach. He would have been as appalled by a peacetime deficit of 11 per cent with public debt spiralling towards 100 per cent of GDP as anyone.
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