There’s plenty to debate about the economic policies that have been adopted by Britain’s coalition government since coming into office in 2010, but that the country’s finances were coming to a very dangerous point indeed after the long Blair/Brown binge ought to be beyond dispute. Something had to be done, and however limited the progress (and however much fresh money has been wasted along the way) something has been done, thanks mainly to the efforts of finance minister George Osborne. He was, of course, given a big assist by the fact that Britain had ignored the advice of the likes of Tony Blair, the BBC and Paul Volcker (oh yes) and retained its own currency. That left the pound free to sink to a level that reflected market perceptions (a strong currency has to be earned) and it meant that the UK dodged the terrible trap into which the countries of the euro zone have fallen. A half-completed monetary union leaves its members peculiarly vulnerable to market panics on a scale that can convert a liquidity crisis into a solvency crisis, which is why Spain (say) is in much more of a jam than heavily-indebted Britain. I linked to a paper that explained this last year, but, basically, by retaining control of the printing press, the UK can pay its bills so long as there are buyers for its paper. Spain does not have that luxury.
But the price that lenders will demand for taking that British paper can rise very quickly, particularly in the case of a currency that enjoys far less safe haven status than the dollar. When the Coalition took power, there was every danger of a renewed run on the pound, and with it the need to hike interest rates (and thus borrowing costs) to levels that would have fed on themselves. To avoid that disaster, Osborne had at least to signal a change of course. And he did.
The alternative would have been disaster, as the IMF’s Christine Lagarde recognized today:
“The gain that resulted from the fiscal consolidation that was decided two years ago has been that result, the credibility of the UK government and its ability to borrow at extremely favourable rates….Sometimes you feel like you could look back and wonder ‘what if?’. And when I think back myself to May 2010, when the UK deficit was at 11% and I try to imagine what the situation would be like today if no such fiscal consolidation programme had been decided… I shiver.”
Food for thought.