An odd Budget claim on gilt yields
Three years ago, George Osborne was very clear that maintaining the UK’s credit rating was a key test of his Chancellorship:
So we will maintain Britain’s AAA credit rating.
Post the downgrade by Moody’s, he seems to have changed his mind. Today’s Budget document contains a change of tone.
The credit rating is one of many important benchmarks, but near historic low gilt yields continue to reflect the market-tested credibility earned by the Government’s economic strategy. As Chart 1.9 shows, UK long-term interest rates were around the same level as those of Italy and Spain in May 2010. Italy and Spain now face long-term interest rates of around 5 per cent, compared with near record lows of around 2 per cent for the UK.
The credit rating has gone from something so serious that the mere threat of a downgrade demanded an immediate general election, to ‘one of many important benchmarks’. Paying too much attention to the rating agencies was always a silly idea, but even so this is quite a shift in rhetoric.
Now they can’t point to having ‘safeguarded AAA’ the government obviously feel they need benchmark to demonstrate their ‘market-tested credibility’.
The notion that low UK gilt yields reflect the market’s confidence in UK fiscal policy was been widely debunked. Rather than reflecting market faith in the UK’s austerity programme, low yields actually reflect worries at the continued lack of growth coupled with a sector savings imbalances.
To see that UK yields are not being driven by austerity one need look no further than chart 1.9 of today’s Budget, the very chart referred to above.
Whilst the text above refers only to Italian and Spanish yields, the actual chart also shows US, French and German ones.
What is remarkable is that yields in the UK, the USA and Germany have generally moved together over the past two years. This rather suggests that UK yields are being driven by something other than fiscal policy and claiming that low yields are the result of ‘market-tested credibility’ is rather incredible.