The UK is looking inwards with the “debate” about public spending. Meanwhile events elsewhere may have a bigger impact on our economic future. On Tuesday China raised her interest rates, seeking to slow her inflation rate which is lower than than our RPI inflation. There were serious wobbles on Wall Street, as investors worried about the security of title to various packages of mortgages that have been sold around the markets and banks.
It was a timely reminder that a lot remains to be fixed in the world economy. In the run up the G20 there has been a chase to the bottom, with various countries seeking a lower currency. The modern form of protectionism stalking the markets is the attempt to get a currency down or keep it down. The spat between the US and China over the relative value of the renminbi and the dollar is just the most important of a series of such arguments.
Real world interest rates make the Bank of England’s official rate look increasingly irrelevant to the private sector. The Monetary Policy Committee solemnly meets to settle the government’s rate of borrowing. You, I and UK companies cannot borrow at anything like the official rate, and even savers now get rather more than Base rate for their deposits. The Bank keeps the rate low to help the public finances. The US does the same, and adds in there the prospect of printing more money just in case the markets don’t want to go on picking up all of the bill.
In the UK the government would be wise to accelerate the asset sales programme to cut the amount of borrowing, given the government’s wish to spend so much more than it collects in taxes. There are limits to how long a country can hold interest rates artifically low in order to borrow more at low rates for government purposes. There are also prudent limits to how much a country should seek to devalue its currency through excess money creation. Do it too much and you import a lot of inflation.
This week’s figures for public borrowing showed a new record level for September, higher even than 2009. The Spending Review showed the pressure of higher debt charges continuing to drive up total spending. Revenue from Income Tax was disappointing suggesting some of the high earners have gone elsewhere.
The Channcellor’s economic strategy relies heavily on above trend growth for four years, delivering large increases in tax revenue. The Spending plans bring the deficit down only because of this forecast buoyancy in tax receipts. We need to watch both sides of the account to see how well it is going.