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Osborne: We need rate cuts not spending spree
Paul Waugh, Deputy Political Editor29.10.08
SHADOW chancellor George Osborne called for swift interest rate cuts today and warned that Labour's plans for a "spending splurge" could damage Britain for more than a decade.
Mr Osborne hit out as Alistair Darling prepared to make a landmark City speech that is expected to confirm that the Treasury will try to spend and borrow its way out of recession.
The Chancellor was set to sound the death knell for Gordon Brown's own fiscal rules in which he attempted to keep debt down and balance the public finances. Mr Osborne claimed that the dumping of the fiscal rules would destroy "the final remaining pillar" of Labour's economic record.
In a significant hardening of the Tory Party's position on the financial crisis, he warned that "endless white elephant public works programmes" would do more harm than good in the long run.
Mr Osborne also broke with his practice of not commenting on Bank of England decisions on interest rates by instead calling for swift cuts to boost demand. Two "hawks" on the Bank's monetary policy committee last night signalled that they too now wanted rates cut.
In tonight's annual Mais lecture to the Cass Business School, the Chancellor was set to declare that the Government will follow its bank bail-out with a similarly bold approach to public finances, claiming that "just as markets change, so should policy". He was expected to say that policy on taxation and expenditure should reflect the "exceptional" circumstances of the credit crunch, while seeking to reassure the City that borrowing would be brought down in the medium term.
Mr Darling signalled that he wants other nations to follow Britain's lead with Keynesian-style boosts to public spending to combat the recession.
"Today, governments all over the world are using approaches that had until recently been consigned to policy making history, but it is natural that the conduct of policy should evolve," he was set to say. "Three weeks ago, we worked with other countries to put in place a plan to stabilise the banking system. These countries are committed to working together to strengthen supervision in the global financial system. And today we need the same determination to support the wider economy. To ensure that fiscal policy supports monetary policy, here and across the world."
Writing in the Daily Telegraph, Mr Osborne said the UK could suffer from decade-long economic decline should the Government increase spending by borrowing more. He said that would be "exactly the wrong approach", adding: "The policies that got us into this mess cannot be the ones to get us out of it."
The fiscal rules, now likely to be officially ditched in the forthcoming pre-Budget report, were introduced by Mr Brown as chancellor in 1997. They require the Government only to borrow to invest over an economic cycle and to keep debt below 40 per cent of national income.
Reader views (18)
We are already seeing the effect of the country's excessive indebtedness in the 25% depreciation of the exchange rate, of which the inevitable effect on prices and living standards has yet to be felt. Neighbouring countries, which have husbanded their resources better ie not overspent when times were good, are not experiencing this. Indeed their exchange rates are hardening.
This is a direct result of Brown's 10-year credit binge. Now we face a situation where we will be forced to increase borrowings to fund the inevitable costs of recession. To increase that indebtedness even further by a 'Keynesian' splurge of public spending can only make matters worse.
One suspects that the main motivation here is to shore up the Labour vote in time for an election in May 2010. The resultant problems, and the politically-difficult measures necessary to tackle them, can then be left as a legacy to an incoming conservative government.
- Richard Shaw, Pinner UK (London Borough of Hillngdon)
There are two threats to be conquered, Debt and Climate Change. Effective/economic investment to counter the latter - that it would produce income in the form of renewable energy - could start countering the latter.
From 1086 until the middle of the last century Renewable Energy, Human, animal vegetable and mineral was a source of Wealth and Power, it can be again given the right engineering and leadership.
We should put the Debt/Climate Change initiative on a "War" footing, in wartime one borrowed for weapons manufacture. We desire peace from Debt and Climate.
- Ferrand Stobart, Ludlow UK
Wake-up George a rate cut is for tax payer! Do you honestly think wee Gordie's freeloaders will stand for that.
- Mike, London
I had my doubts about Brown and his ability to govern in crisis situations , but i believe he has taken, and is taking the right steps tp stimulate the economy and stave of high unemployment and business closures, thank god Cameron and his shadow chancellor are not in office or we would be back to the high unemployment of the eighties, i am sorry Mr Osbourne but the Conservatives are showing in opposition the same attitudes that got them out of office before.
- Brian, Wiltshire
The UK has lost the capacity to generate sustainable wealth and needs desperately to regain it. For too long the cost of capital has been too low and taxes too high, what is needed is economic reality, the deck of debt has collapsed. To assist Brown could at last recognize and understand the impact of the tsunami of debt he generated over the past 11 years and stop borrowing to fritter away the UK's remaining wealth.
- Brian Edmonds, Farnham UK
I'm very surprised George Osborne and the Tories think that borrowing to bring forward the building of affordable houses, improving schools and the infrastructure for the 2012 Olympics are ' endless white elephants'. He should look again at the Tories record in 1992 when public spending was 8% of GDP. The figure today is 4%. The government's debt level is one of the lowest in the world. Oh, and in case he has forgotten, because he has had so much else on his mind of late, the BofE is responsible for interest rate cuts, not the government. Is this an example of how he would use this new watchdog on public spending committee he intends to set up; listen to it when it agrees with him, and overrule it when it doesn't. After this latest utterance from boy George, he proves yet again that he wouldn't know where to start when it comes to running the economy.
- Val Daniels, Mijas Costa. Spain
Lb - "Low interest rates were in part reason for the ridiculous, unsustainable housing/mortgage bubble that caused this so called credit crunch". Don't worry -
It was probably as much the fault of easier credit policy by lenders, as the actual level of rates. Gordon Brown was at the centre of encouraging these easier, high levels of lending to increase tax revenues for over 10 years(no more- due to the fragility Nu Labour economic miracle). If rates aren't lowered aggressively soon, the effects of the oncoming recession will be increased and more profound. House valuations are already being decreased radically and banks are unwilling to lend as large a percentage of value as before. In the current climate it is doubtful that banks will be increasing absolute levels of lending anytime soon. Frankly, the economy as a whole will need all the help it can get. Whoever wins the next election will inherit a poisoned chalice as far as the economy goes- it is disgraceful that Brown is delighted to pledge our financial futures without any expectation of being held accountable. He should forfeit his salary and pension rights forever as a result of his dreadful mismanagement of the UK economy - irrespective of the larger global picture....
- Paul G., London
The situation now indeed warrants rate cuts! After 10 years of top down heavy state intervention by the Mr. Bean Brownies the economy now NEEDS lower rates. Just keep wasting money by the state and increased taxation has obviously not worked!
- Steveo, London
GO is pretty much spot on I think, hopefully we're over the worst of inflation. LB, having lower interest rates mean existing debt is easier to service and pay down, lower interest rates does not mean institutions are more willing to lend. UK PLC needs to paydown or write off some of the trillion plus of personal debt to a managable level and accept lower disposable incomes.
- Steve Rook, havering
Yes rates were too low at a certain point in the cycle but at this juncture they are way too high, maybe even 300 points too high! The real lesson of Japan is that they left it too late to cut rates and found that even when rates were at 50bp they had no stimulatory effect. By cutting rates aggressively you relieve acute pressure at a critical point in a crisis slowing and flattening the trajectory of the correction. In doing so you buy time and allow for an orderly market in asset sales and debt restructuring particularly on the personal front. This should also be accompanied by a very clear message from government that rate gouging by the banks will be severely penalised. The mere threat of regulation will make them think twice about rip off rates of interest. It is in no ones interest to see the housing market crash. No one wins even those gleefully anticipating buying houses at half former prices. Dream on. Comparisons with Japan are really arithmetically inaccrurate. At $140,000 a square foot that would value the average peak UK house of 1800 sq ft at $250 million. That is clearly not the case so the doomsters have got to stop talking out of their rear vents and get real. In 1998 there were predictions of a complete meltdown in the global financial system. It didn't happen.
- James Ritchie, New Malden, Surrey
In calling for a cut in interest rates does it not occur to George Osborne that pensioners are more likely to having savings than mortgages? And come the next election, they're more likely to vote.
- Tonyb, Melbourne, Australia
Savings should be encouraged with higher rates.
Why reduce rates for people to buy goods with money they only have to pay back.
This is what happened to get us into this mess,
- Bernard Parke, GUILDFORD
The correct thing to do would be to cut taxes and let the people decide how they spend their money. There is no point having new hospitals and schools when people are losing their house or being made bankrupt because they havn't got the cash to meet their bills. Borrow to give tax cuts, not to keep builders busy. It is partly their fault we have had so much house inflation and we would be bailing them out along with the banks, who were also part of the problem.
- Dan, Manchester
What Mr.Osborne understands about the UK or world economy can be printed in a large font on his small fingernail. Past Conservative attempts to manage the economy of this country have been abysmal failures. It would appear that he intends to continue in that vein.
- B M, Colchester England
The landscape is changing rapidly. When the circumstances change, minds and rule-books must be amended accordingly. Alistair, a massive interest rate cut is required urgently (100-200 basis points). But, George, well-targeted fiscal stimuli are also necessary. However, Gordon, pouring money into massive high profile government infra-structure projects may not be the best targeted fiscal stimuli. Tax cuts for those who will need to spend it immediately, ie low to lower middle income families would be more effective in the all-important short-term.
- Blackstone Coke, London
Rate cuts aren't the answer either. It is debt reduction that is needed and not simply reduction in the cost of carry of that debt. Even if the BOE does cut rates there is little chance that it will be passed on by the commercial banks anyway except on those savings accounts of the prudent that do live within their means.
- Bruce, London
Low interest rates were in part reason for the ridiculous, unsustainable housing/mortgage bubble that caused this so called credit crunch
Now they want to cut lower than before?
God help us
- Lb, London
He is right. We have had so many tax increases over the Crash Brown years that our economy has... crashed! Rate decreases are the right way forward.
- Georgie, Islington, London
