Cable calls for increased borrowing before budget
March 8, 2013 1 Comment
By Luke Prescott
Vince Cable has rebuffed the government’s borrowing record, and has urged the Chancellor to change course and borrow more just two weeks before the 2013 budget.
Cable states that the perils of a sustained lack of capital spending –spending that is funded by Government borrowing – is leading to a slow recovery, and is now a bigger economic threat than a loss of market confidence. An absence of economic growth in 2012, and meagre prospects for 2013 has encouraged Cable to abandon the party line, he says, and instead call for increased government borrowing.
The Chancellor George Osborne regularly cites the low borrowing costs the Government enjoys – despite choppy economic times – as a testament to strong confidence in the Coalition’s economic Plan A. Osborne stressed the borrowing costs were kept low due to retention of the UK’s coveted, but now-lost, AAA credit rating.
The Chancellor has been defiant since the downgrade in late February, downplaying the significance of the failure of the self-set economic test he spoke so much about. The significance is more of political embarrassment than any real change in economic outlook.
And is he right? Probably. It’s likely that the low borrowing costs for are not due to a confidence in the Chancellor’s stewardship of the economy, but of the lack of suitable or secure investment opportunities in the wider economy. Investors are finding it difficult to find suitable places to invest their funds in a zero-growth environment, and are likely to stick with offering low-cost bonds for the Government, whether they change course or not.
Cable outlined key areas for focussed stimulus that would be beneficial to the wider economy, “Target two significant bottlenecks to growth: infrastructure and housing.” Indeed, increasing the depleted affordable housing stock would provide a kick-start to many areas of the economy, and also release much needed disposable income from the tenants of the ever-inflating private rental market – boosting growth in the service sector.
The Deputy Prime Minister, Nick Clegg, agrees with his Lib Dem colleague, but the Prime Minister is unmoved by Cable’s remarks in the New Statesman. David Cameron states that veering from the path set out three years ago, would send the UK economy ”back into the abyss.” The Coalition has been goaded and mocked by the Labour front bench for sticking to their Plan A they say isn’t working and for not having a Plan B to fall back on. Cameron insists this is not the case and has referred to a ‘Plan A Plus’.
The ‘Plus’ is an admission that there needs to be an active push for growth – but to fit around the central plan of reducing the deficit. The Chancellor will outline his budget in two weeks time without the series of leaks that left the 2012 budget in so much disrepute, so we’re unlikely to find out the exact details to the ‘Plus’ until then.
In his speech, the Prime Minister will emphasise increased exports since 2010, which could be a signal for more quantitative easing in the months to come, most probably, in May 2013.
Usually reserved as economic-shock-treatment, QE cheapens exports and senior members of the Bank of England’s Monetary Policy Committee, including Sir Mervyn King, registered their support for the expansion of the QE programme in the last MPC meeting.
The latest vote, today, suggests the vote was split similarly to the last vote. The pound had fallen earlier, amid speculation of expansion of the QE programme (to less than $1.506), but rose quickly after the MPCs announcement. Speculation, however, will return to the next MPC meeting since the expansion of QE remains very much a ‘live issue.’
Whether the Coalition sticks to Plan A or changes course, the open disputes in the Cabinet are not good for market confidence, nor electorate confidence. Vince Cable’s remarks have been met with dismissal and support from the PM and Deputy PM respectively. This all leaves the economy, and the Chancellor, in a more vulnerable position.