Archive for the ‘Economics’ Category

23 Apr

The Telegraph tries to find worse and worse ways to scare us about a Hung Parliament

Posted by freethinkingeconomist in Economics, Politics. Tagged: , , .

Ian Cowie really is plumbing the depths here. I should not read such stuff on so much caffeine.  Imagine a starving Jack Russell being electroprodded by a toddler and you are nowhere near the level of irritation.   Here is Cowie’s thinking, to put it kindly:

The last time a British election failed to produce a decisive result, in February, 1974, the FTSE All Share Index – a broad measure of the stock market – fell nearly 15pc in a month and ended the year more than 50pc below where it began.

then he notices

Of course, the past is not necessarily a guide to the future and many problems present 36 years ago are absent today. For example, there are few strikes, no oil crisis and electricity supplies are uninterrupted. More than two thirds of earnings reported by companies listed in London are generated overseas today, compared with less than 10pc in 1974.

In which case, perhaps the right reaction is “I should stop writing this column now”.   I believe we may have had divided Parliaments the 1660s too.  Shall we look up the stock market from then as well?  But, no, Cowie ploughs on:

But human nature and market psychology have changed little. Ted Scott, director of UK strategy at F&C Investments, which runs some of Britain’s biggest investment trusts, said: “The initial reaction of both the equity and gilt markets to a hung parliament would probably be sharply negative.

What is soaring inflation, cratering profits, a rampant labour sector, a chronically inflexible and structurally unsound manufacturing sector, a government newly arrived to the difficulties of floating currency management, all of these things compared to Mighty Human Sentiment?  In the 1970s, some companies fell to a Price Earnings ratio of about THREE. If the stock market ‘crashed’ 15% now, it would still be about 40% above the lows of March 2009.

He goes on to repeat a bunch of outofdate nonsense about ‘defending the pound’ (why?  We want exports.  Osborne wants exports! That’s why you Telegraph types hate the Euro!) and mortgage rates soaring (again, why?  With long term inflation expectations at 3%  or so, why?   The article gets even worse when he wheels out Ros Altmann to do her usual pro-savers pitch: you know, how we might have been better off if interest rates had been 5% instead of 1% (imagine what the static money supply would have been in that case.  Down 10% perhaps?  Why do people always use the Telegraph to post their entries for the Worst Economic Advice of the Year competition?)

It looks like Hamish McRae is more sensible here: “The election will not ultimately determine the route of Britain’s recovery”

we tend to overstate the significance of politics in determining economic outcomes. Of course the election matters; it just does not matter as much as it might seem . . . ome things have become clearer over the past couple of weeks. The most important is that the global recovery is broadening. The data is still uneven but then it is always uneven at this stage of the cycle. Corporate confidence in both the US and Europe seems more secure and I find that particularly comforting because many people in the business community were really quite frightened by the collapse of demand they found themselves confronting..

His column remains fixed on the World Economy.

Come back to the implications for financial markets. We can be reasonably sure of the recovery. We know that the world’s big companies have made big advances to their performance and efficiency. We have seen this confidence reflected in share prices.

How very very different from the 1970s.  Pity for the Telegraph, who seem to spend an inordinate amount of their time fantasizing about us being back there.

UPDATE: A friend and FTE reader sends me a link to David Marquand, which puts it plainly:

There was a hung Parliament in 1974, but the circumstances then were so different from ours that it has no useful lessons for today.

Instead we get the 1924 precedents for hung parliaments.  How did it go?

Baldwin made it clear that he would have no truck with any anti-Labour deal. Asquith did the same. As the leader of the largest party, Baldwin rightly stayed on as Prime Minister until the new Parliament met in January 1924. His Government drew up a King’s Speech. TheLabour and Liberal parties joined forces to vote it down. Baldwin then resigned, and the King, George V, sent for MacDonald, who formed a minority Government – the first Labour Government in British history. It turned out to be spectacularly successful abroad and boringly competent at home, an ideal combination for a party whose chief task was to prove that the country and the constitution were safe in its hands.

Read the whole fascinating article, unless you are Labour and queasy about the future.

22 Apr

Up-and-coming Washington Think tank peruses Transaction Taxes …

Posted by freethinkingeconomist in Economics. Tagged: , , , .

… and dispels the case for the Robin Hood Tax in several elegant paragraphs.  A financial transactions tax

is not focused on core sources of financial instability. An FTT would not target any of the key attributes—institution size, interconnectedness, and substitutability— that give rise to systemic risk.

Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector. No doubt some would be borne by owners and managers of financial institutions. But a large part of the burden may well be passed on to the users of financial services (both businesses and individuals) in the form of reduced returns to saving, higher costs of borrowing15 and/or increases in final commodity prices. … It is far from obvious that the incidence would fall mainly on either the better-off or financial sector rents

These startlingly obvious points needed making, which is why I have made them here, and here and so on. They are not controversial, and don’t need a particularly high level of empirical investigation.  An FTT is a bit like a higher price of doing something – a higher commission, say. You don’t need a massive regression analysis to work out that higher wholesale commissions tend to end up in higher retail prices.

What the IMF DO propose (for it is them) is extremely interesting and worthy of examination and possible support.  The levy on balance sheets has been explored by Pres Obama; the FAT tax – on the total rent-surplus extracted by the shareholders and employees – much more intruiging.  Naturally, Robin Hood Tax campaigners don’t like it, and call these sensible objections ‘tired and discredited’ (unlike the idea that you can take hundreds of billions from an industry without further serious ramifications, which is no doubt ‘fresh and interesting’).  But their major objection is that it is NOT ENOUGH:

So, is it enough? No, not by a long chalk. The IMF report accepts that the costs of the financial and economic crisis amount to 2.7% of GDP in the advanced G20 economies (ie nearly£50bn), but the Financial Activities Tax would raise (in the UK, the only place where it gives a figure) just 0.1-0.2% – or £1.75bn to £3.5bn

That is about what CGT raises – it is not chicken feed.  And it is just the Value added part – a levy on the balance sheets (15 bps on 1 trillion, say?) might raise some more too.  But no: these wouldn’t on their own eliminate world poverty.

But it is still too much for some, who call it a ‘Punishment Tax’. Those freemarket lunatics the French are leading the charge:

French banks are opposed to increased taxes, arguing that the country’s regulatory and lending frameworks prevent excess, and that it has cost the taxpayer nothing. The industry has paid €2bn ($2.7, £1.7bn) to the Treasury in interest for a government support package, most of which has been repaid.  The French Banking Federation argued that a tax would reduce economic growth by hampering banks’ ability to lend and has instead argued for better regulation and supervision across G20 countries

And as the recent money figures have shown, bank deleveraging is still a risk.  A further interesting observation:

“The proposed taxes, however calculated, would certainly bolster government revenues but would not reduce risk in the system and, ironically, could increase it by implicitly building in an insurance to pay for banks’ risky behaviour,” said the Association for Financial Markets in Europe.

The longer term intention of the IMF is to raise 2-4% of GDP. (Is that a stock or a flow?) If a flow i.e. yearly amount, then it is a huge tax. But it is not clear and I have not read enough.  But ‘Analysis by Credit Suisse, a bank, showed this could result in the loss of up to 20 per cent of pre-tax profit for the European banking sector’.

About which I don’t know what to think.  If (see previous posts) banking is one big oligopoly, getting at their profits is no bad thing. But as CG observes (below), “the fact is that taxing banks removes potential equity capital and will require banks to raise more equity to be as safe as they would be without the imposition of a new tax.”

For a far superior discussion of bank taxes, whether they will happen, and so on, the peerless Chris Giles has it on his blog (which you can all read, unlike the FT, I hear)

21 Apr

Iain Dale’s Misleading Fact of the Day

Posted by freethinkingeconomist in Economics, Politics. Tagged: , , , .

He says in his title: ‘Unemployment is always higher under Labour’

Well, no.  Let’s look at the Claimant Count as a simple measure:

My rough averages say: Conservatives since the War have averaged a claimant count of 1.56 million.  The Labour party: 900 thousand.  Clearly you have to interpret Iain’s post differently from the obvious “unemployment under Labour is always higher than unemployment under the Conservatives”, because that would be an obvious lie – and Iain is not a liar.

What he is saying, instead, is that unemployment has always ended Labour’s terms in government higher than at the beginning.  Well, quite possibly.  Since the War, as the graph shows, we have been through a period of generally rising unemployment.   But it is not true that each Labour electoral term in power has seen such a performance; neither 1997-2001 nor 2001-2005 had higher UE counts at the end than at the beginning.

Can the Tories be accused of ending each period in office with higher unemployment? No; because of Edward Heath.  1952-63 saw higher unemployment.  1979- 1997 did too, breaking several records along the way.  Edward Heath managed to avoid it through what was perhaps the worse period of economic management ever – the Barber boom, one of the major reasons that Healey had such a devil of a time in the next few years (Heath’s caving to the miners also helped).   Otherwise, Tory Governments can be accused of the same thing that Iain Dale implicates Labour governments in – causing unemployment to rise.

Bizarre, huh?   perhaps Dale wants to write a post defending Heath’s economic policies next, because the by the criteria he uses for judging success, they were the only decent government we had.

UPDATE: Paul C has a narrative version of the point I’m making here, which is well worth reading.

21 Apr

Podcast: another quick observation

Posted by freethinkingeconomist in Economics. Tagged: , .

Dan Roberts and I argued at greater length than is eventually broadcast, about whether the LibDems are introducing too much complexity into the tax system with their 10k proposal.  Dan’s argument was, effectively: doing this makes it a nightmare for journalists, commentators and those putting the manifesto under the spotlight, to work out whether it benefits X or Y.  So who wins from Lib Dem proposals? For many, it is hard to say.

I answer was and remains: that is so not the point! The complexity that matters is that which confronts the people using our tax and benefit system, not the wonks working out its implications.  Of course there is complexity – people are in a myriad of different situations.  If we choose a tax system that maps perfectly to human complexity, our tax system will be horrendous, and we won’t be thanked for it.

What we need is a tax system that is easy for its users, not for those professional wonks who work out the decile-benefit bars (ie. the IFS and the ONS).  I am all in favour of systems that reduce the number of transactions and relationships between the individual and the state. The 10k tax proposal might not improve the circumstances of everyone in the bottom income quintile, at least not seen in a static way (which is how Labour planners can see things; rather than making it more attractive to be in another quintile, of course).  It certainly makes work more attractive.

And I hope it means making it less important that people earning around 10,000 need to learn how a myriad of benefits and credits work.   What strikes people as nuts is that the bottom quintile sends a lot of money to the state, and gets a lot sent back.  Reducing that two-way flow seems unambiguously sensible, so long as not too many people are hurt in the transition.  Worrying about how hard it is to work out from a Westminster thinktank or newsroom who the winners and losers are, is a distant secondary consideration.

21 Apr

Podcasting on Goldmans, Libdems and The Volcanic risk to Globalisation

Posted by freethinkingeconomist in Economics. Tagged: , , , .

If it’s just my dulcet tones and stuttering delivery you want to hear, go to about 9 minutes in.  But Dan Roberts and Ruth Sunderland are both excellent on some clearly very topical matters.

The Goldmans case is continuing to dominate the financial chatter.  I think questions of justice and the financial system as a whole will soon start to dominate those of the strict legality of the trade concerned; for example, Peston uses the case to asks ‘where do these hedge fund profits come from?’ In most cases, I would answer: by allocating capital in such a way that reflects underlying profitability better, or some such words.  But in this case we can see a machine funnelling from a seemingly ill-informed party to a well-informed party.   In my comments I wanted to draw attention to the irresponsibility of the buyer of these CDO’s, ACA management and the Germany buyer (I think IKB).    But ultimately, they were so bad at buying these things, it was not just they who paid for them.  Peston:

it wasn’t just deep-pocketed professional investors – banks and insurers – who were on the other side of the hedge funds’ bets. When the hedge funds picked up their winnings, it turned out that some of these banks and insurers didn’t have the moolah. And the bill landed on taxpayers’ doorstep.

A Guardian podcast is not the best place to find a defence of Goldman Sachs.  Dan points out that they too lost money on this deal, which is surely important.  And Brad DeLong reports the most interesting view of all here:

Perhaps the reason that Goldman Sachs is so outraged at being accused of playing the investors in Abacus by concealing from them material information–that John Paulson played a big role in selecting the portfolio–is that they are totally innocent. Perhaps they were not trying to play the investors in Abacus by handing them a sub-standard produc. Perhaps, instead, they were trying to play John Paulson–a man who showed up with irrational expectations, eager to make bad bets, and who would have lost heavily had not he struck it freakishly lucky …

Please read the whole thing

I’ve been there: at my old company, some people bet repeatedly on a stock market crash from 1996 to 2001, and mostly lost a lot of money.  Similarly on the housing market.  Taking the other side of such people – who afterwards tarted around their supposed prescience – was generally a good policy – and was certainly profitable as a business strategy. Choosing just that one time they made money and extrapolating is dangerous.

So the ethics of this transaction might turn out to be fine, but people still have a right to ask whether such exchanges should be controlled, taxed, or stopped in some way, because their full implications go far beyond the private bubble in which the deluded or cynical participants actually operate.  The bills, in particular, have landed elsewhere.

Finally on Goldmans, Lex has an interesting observation:

Goldman has even done shareholders a favour by sharing more of its revenues with them, rather than paying them out as compensation, which accounted for only 43 per cent of net revenues, down from 50 per cent a year earlier. This is Goldman’s lowest ever compensation ratio as a public company … Assuming Goldman’s bankers can soldier on with a lower share of revenues, this boosts shareholders’ returns while denting the political case against them. But it does raise the issues of whether its bankers needed to pay themselves so much before, and whether Goldman is benefiting from what is now, post-crisis, an oligopoly in mega-flow banking.

20 Apr

So I get things wrong sometimes …

Posted by freethinkingeconomist in Economics, Politics. Tagged: , , , , .

… or at least, that may be how things look soon if inflation continues doing what it has just done – rise faster than expected.  Because while my original points about base effects and so on are correct, it is no good if the actual index rises 0.6 points in a month like this.  Perhaps the VAT rise has a delayed effect.  Prices are up 0.8% since December, while VAT rose over that period by 2.5%.   But perhaps instead the economy is stronger than I expected, deflation is unlikely, and I will lose my bet with Guido.

Who is interesting and generous here about Liberal Democrat MP’s:

As Tories scream and point to Lib-Lab councils and the bearded sandal wearing activists who want to ban the bomb and legalise dope for purchase in euros, Guido says look at the reality.  Since Charlie Kennedy’s demise the LibDems have been moving quietly to the right on economics, have jettisoned a lot of their loopiest policies and the Tories under Cameron have moved towards the LibDems on civil liberties, the environment and localism

(whereas Redwood is typically hysterical about 3.4% inflation here.  Coming of age during the 1970s seems to play havoc with your sense of proportion.  Chris Giles is more nuanced here: “A little more equivocation and is once again likely. Sadly, it appears no longer a time for complacency over inflation.”

And Conway’s take is always worth reading – though I think he is wrong about how easily our debt costs could rise.  Because of long maturity funding, a 200bps rise in funding costs would not be drastic, since we don’t need to refinance soon. )

Being wrong part II: I thought following Odone’s nastiness yesterday that I could casually wander over to the Telegraph and pick up more examples of that sort of thing.  But no.  Here is Tracy Corrigan in a very forthright post about why she can’t vote for Cameron:

The fact that Clegg appears to address others as equals  suggests either that he is naturally personable or, at least in this matter, politically adept. That is quite an important skill in a political leader, and neither of the other two have it.

And here is Mary Riddell:

The one certainty of this election is that the case for electoral reform will be irrefutable. If Labour end up ahead, they may have to accelerate the plans for an AV system and House of Lords reform. That might (just) satisfy the LibDems, and the country. But Mr Cameron’s only promise of change is to cut the number of MPs, which would make the first-past-the-post system even more unfair than it is now. Nor has he any plans to oust the last of the hereditary peers. That makes the Tories not the party of change but of stasis.

Something else I am wrong about: listen to the first 5 minutes of this podcast and you learn that all three parties pay pretty serious lip service to the mistaken idea that a transactions tax is what is needed to fix finance.  They are confronted with a Robin Hood Tax campaigner who does not seem to see any serious implications from trying to raise $400bn annually from the seriously undercapitalised banking sector, and none have the courage to be remotely analytical about it.

But here finally is something I feel right about.  Marriage is not the reason children do better in married households. That was put clumsily – read the original.  It adds even more fuel to a sceptical fire burning under the Tories’ marriage tax proposals.   Here is the essence:

there are differences in development between children born to married and cohabiting couples, but this reflects differences in the sort of parents who decide to get married rather than to cohabit. For example, compared to parents who are cohabiting when their child is born, married parents are more educated, have a higher household income, and a higher occupational status, and experience a higher relationship quality early in the child’s life. It is these and other similar factors that seem to lead to better outcomes for their children.

Good to get some things right

20 Apr

The Goldmans Sachs Charges: again, when are market decisions uncoerced?

Posted by freethinkingeconomist in Economics. Tagged: , , , .

This is something else I feel I ought to know more about.   For many, the revelations about how Goldmans and their client Paulson & Co operate will be enough; do people really make a career out of this sort of thing – let alone a fortune? Clearly wicked, clearly wrong.

But the debate in the blogosphere looks like being more nuanced, coming down to who said what in which documents.   After all, for derivative contracts, you need to find another party.  Google my name in 2004 and you get stories about me trying to match buyers and sellers on the future direction of the housing market.  Without punters in one direction, you can’t get them in the other; and, presumably, they have taken a decision for themselves to have their views on the price and future direction of housing …

Here are some links on the whole subject:

Did Goldman’s use Computational complexity to hide Lemons?

Economist Free Exchange has several good links, including one to a typically forensic Brad De Long explaining how finance creates win-wins.   RA explains why this case is so important:

Of course, Goldman is unpopular enough that this might let loose a wave of subpoenas and hearings, one of which might turn up something Goldman can’t beat, even if it wants to.

Here are the League of Gentleman, who explain the essence of the charges nicely:

how this is going to be taken is that GS (and other investment banks – see Magnetar) were double dealing with utter contempt for the buy side.  On one hand, they were creating portfolios that were designed not for the long-term economic interests of the investors, but for hedge fund clients looking to bet against the subprime mortgage market.

At the more shrill end (but quite possibly correct) are Johnson and Kwak, who call Goldman “Too big to obey the law“.   This observation strikes me as very pertinent to our own:

Jamie Dimon (the articulate and very well connected head of JP Morgan Chase) already told Treasury Secretary Tim Geithner over the weekend, if we “demonize” our big banks in this fashion, it will undermine our economic recovery and could weaken financial stability around the world. Dimon’s points are valid, given our financial structure – this is exactly what makes him so very dangerous. Our biggest banks, in effect, have become too big to be held accountable before the law.

We have a financial system that is overly dependent on banking.  This is surely what Liberal Democrat proposals to change the economy must amount to – beneath all the moral bluster essential to electioneering.  As I observed in Credit where It’s Due, our financial structure relies too much on banking being solvent and vigorous and well incentivised, the lack of which conditions is undermining the effectiveness of QE.  (I am not sure about what ‘forcing them to lend’ means, though).

It is interesting how neatly this ties in with my theme of the previous post about market decisions.  And again, I don’t have a neat answer.  The glory work is done by theorists, the real world needs solid empiricists.

19 Apr

What’s going on

Posted by freethinkingeconomist in Economics, Politics. Tagged: , , .

(apologies to those of you who arrived at this site expecting something about a Marvin Gaye record.  You will be bitterly disappointed).

This graph demonstrates cat out of the bag, Google-style:

I had worried slightly that my dismissal of the Conservative dismissal of the Lib Dems was underproven (i.e. a big sulky exaggeration).  Perhaps, instead, they are about to show how the Big Society will transform Britain?  Oh, here’s Boris Johnson:

They are a bunch of euro-loving road-hump fetishists who are attempting like some defective vacuum cleaner to suck and blow at the same time; and the worst of it is that if you do vote Lib Dem in the demented belief that there could ever be such a thing as a Lib Dem government, you won’t get Prime Minister Clegg. You’ll get Prime Minister Gordon Brown

As Liberal Vision put it,  ” “We know best” just isn’t a very smart political line in an anti-political age.”

You can also read Christina Odone writing about Doctor Death. Yup, that’s making her popular

But does Johnson have a point about inconsistent Lib Dem messages around the country? Maybe. I have notspent any time with them up North, but this charge is often heard. Expect it to be heard some more, and the general pressure of being popular to force some difficult consistency in at times.

But if you want eachwaysucking Hoovers, how about “We’ll cut the deficit, not the NHS?“  How about a Broken society somehow managing the massive voluntarist frenzy to become Big?  How about comparing what Conservatives said about Green issues in 2006 to their commitment to prevent fuel prices rising too high? How about lambasting the government for failing to deal with inequality, and then putting all their available cash into schemes that could only increase it?

All parties have inconsistencies in their approach.  I have found fault in some of the Lib Dems’, which sometimes stem from their very democratic structure. I try to be open about my criticisms.

The Conservatives have no excuse in this area. Their policies are command-and-control (ironically); and their inconstencies have instead stemmed from a very irresolute strategy – rebranding at first, then a rush back to Thatcherite economic certainties, deficit fetishism, then tax cuts instead, then Big Society Optimism and Hope, and now another bash at the Fear approach.  Not sure it is working for them.

In the meantime, I’ve read nothing of Labour recently.  Then this tends to happen to the third party …

19 Apr

Desperately searching for Panic

Posted by freethinkingeconomist in Economics, Politics. Tagged: , .

Since April 14th, the odds of a hung parliament have risen from 40pc to 60pc.  I have no reason to doubt the veracity of the FT’s survey of investors: given all they have to worry about, no doubt they would prefer to be able to drop ‘political risk’ from the list, and would prefer undivided power in the hands of either Labour or Conservatives (note: the survey does NOT find they favour Tories).

But market action since the debates has done little to suggest a hung parliament spells Panic and Doom.  Yes, today the pound is down against the dollar:

Though less against the Euro; a lot of this is a flight-to-dollar move following the Goldman Sachs news (you have to invert this graph: downward pointing = sterling strength).

Medium term gilts are also relatively untroubled:

and the expectations for interest rates in the next 18 months suggest weaker rates (you have to take this number from 100; the graph is for September 2011, interbank rates).

So what do I think is going on? The mild currency weakness alongside lower rates for the near future suggest to me that the markets think monetary conditions will be easier than they would otherwise have been.  Depending on whether this is a demand- or supply-led movement, we can’t say for certain that this means X.   It would be unrealistic, in my view, to suggest that the markets expect greater fiscal tightening than before (which might achieve lower future rates and lower sterling  by cutting the government’s demand for borrowing, and depressing the real economy so that it too has little demand for borrowing); the workable Tory majority scenario has receded.

Could it mean more QE in the near future?  Hard to say: none of the parties has said much about this, so it is difficult to map onto a political movement.   Greater toleration for higher inflation in the future?  Quite possibly.   I would like to see the figures from the Bank on this.

But none of them are reasons to panic.   That old cliche of the panic stories, the FTSE, is more affected by the lack of air activity and Goldmans than anything political, and remains massively up in the last year.

(UPDATE: Ed Conway has done it much better here)

16 Apr

Martin Wolf hits several nails on the head

Posted by freethinkingeconomist in Economics. Tagged: , .

In today’s column.  Above all, the theme: Growth is what is needed to fix the finances.

Then he adds his voice to those arguing against the myth of the spending splurge:

the explanation for the sudden explosions in the share of public spending in GDP and the fiscal deficit is not that spending is out of control. It is, instead, that nominal GDP and tax revenue have fallen far below what was expected just two years ago. According to the 2010 Budget, public spending will be just 2.2 per cent higher this financial year than was expected two years earlier, despite the recession. But nominal GDP will be 9.3 per cent lower and tax revenues 18.1 per cent lower.

As I argued at tortuous length in my village anecdote.  You will note that MW has updated his approach since following Policy Exchange’s line last year, when he wrote:

How did this fiscal debacle occur? The answer lies far more in spending, forecast to jump by an astounding 8.4 per cent of GDP between 2007 and 2010

His mention of PX is in this piece. My irritation at people taking such a simple ratio take on spending is one of about 100 reasons that I wrote A Balancing Act.  I have always known that Martin Wolf understood this perfectly, and was mystified at him taking the PX line – and today’s column is proof that I was right.  So I am rather chuffed with this.

Wolf has other good advice today about how to boost investment, including from a much-praised PX paper by ex-FT writer John Willman. It is a good paper.   His column ends with this commentary on the NI controversy:

Finally, we have the question of how to tighten the fiscal position. I would have no problem with Conservative opposition to higher employers’ national insurance contributions, if they had not suggested that greater efficiency alone might replace it. With a need to tighten fiscal policy by at least £100bn (7 per cent of GDP), the UK must implement all the efficiency savings it can imagine, plus real-terms cuts to public sector pay bills and services, plus tax increases. The parties are determined not to discuss these realities. If politicians treat voters like children, the voters will throw tantrums when cuts come.

This is not just criticism of the Conservative position; it must count as criticism of any party who has found something nice to do and a way to fund it.  In a crisis, the bond market might just take the latter, and deny the leeway to carry out the former.  The same might apply to the Lib Dem raising of tax thresholds.  No matter that they are costed, the real world result might be: get rid of pensions reliefs soon, introduce a mansion tax now, and so on – and we will phase in your tax threshold increase as we think it can be afforded.

UPDATE: In a rush, I forgot to mention other nails he hammered:

The second qualification is that the country is not living beyond its means, to any significant degree; the government is. Not only is the current account deficit modest, but the UK’s net liabilities were only 13 per cent of GDP at the end of 2009. On a consolidated basis, the chief creditor of the UK public sector is the UK private sector, not foreigners

I pointed this out a few weeks back, criticising none other than Wolf’s FT colleage Chris Giles for saying Britain is borrowing too much.  As argued on the Long View, Britain is in debt to itself.  This is important, you know …

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