From the TUC

This ‘fiscal credibility’ nonsense

19 Jul 2012, by in Economics

According to the Treasury, the government’s infrastructure plan “is only possible because of the Government’s hard-won fiscal credibility, which the Government is now passing on to support the UK economy.”

Or, as the Chancellor put it:

The credibility the Government has earned through tackling the deficit is already helping millions of British families and businesses through keeping down the cost of borrowing.

Now, as Duncan has pointed out, there is another possible reason for the low interest rates for UK government debt: markets aren’t confident they’ll get a better return from investing in the private sector.

If rates are low because the markets are cheering the government on it’s rather surprising that interest rates around the world for government debt are also at historic lows. In a post that’s been getting a lot of attention in the economics blogosphere, Joe Weisenthal points out that “borrowing costs for government are plummeting EVERYWHERE.” It’s reasonably well known that US 10-Year Treasury bonds are close to an all-time low but he points out that the same is true of Australia, France, Israel and Mexico. Here’s some other rates he lists –

  • Japan: 0.778%
  • Germany: 1.26%
  • Sweden: 1.285%
  • Finland: 1.501%
  • UK: 1.549%
  • Canada: 1.635%

These countries have different fiscal policies, but they all seem to have the same credibility. And, although the government tries to give the impression that the UK is top of the bond market pops, that simply isn’t true.


4 Responses to This ‘fiscal credibility’ nonsense

  1. Gareth
    Jul 19th 2012, 2:59 pm

    You are right on the logic, obviously, but your sample does not exactly support an attack on Osborne: if low bond yields are “bad”, the UK is doing “better” than all those countries, except for Canada. So we should congratulate Osborne, by your logic! He has kept bond yields higher than Sweden’s!

  2. Richard Exell

    Richard Exell
    Jul 19th 2012, 5:04 pm

    Dear Gareth

    You might find para. 43 of today’s IMF report interesting:


  3. Gareth
    Jul 20th 2012, 9:47 am

    Yup. It says bond yields are driven by growth expectations. I agree. So again, on this logic, you agree we should congratulate Osborne for delivering higher growth expectations than Japan (ha! not hard), Sweden, Finland and Germany? Right?

  4. Steve
    Jul 20th 2012, 3:36 pm

    It’s not mentioned in the Treasury press release, but I understand that the Govt guarantees are carefully constrained to avoid them appearing on the public balance sheet (i.e. they won’t increase the deficit). Did I get that right ?

    Not only does this make them appear to be of very dubious value (a guarantee behind an already credit-worthy, well-financed project ?) but if they don’t rest on the UK’s supposedly healthy balance sheet how on earth can they be based on the UK’s “hard-won fiscal credibility”…. or am I missing something ?!