Fiscal

Are Bulgaria and Luxembourg unsung heroes of the global recession? Estonia has received wide praise for its fiscal position, and Poland’s economy is likewise admired for its refusal to contract. But this useful graphic from the Economist shows two additional players for the fiscal saints.

Public debt in Bulgaria and Luxembourg is between 0 and 19 per cent of GDP – a distinction shared only with Estonia. Both countries also share low deficits, as proportions of their GDP. But unlike Estonia, Bulgaria and Luxembourg enjoy below-average unemployment rates: 9.7 and 5.2 per cent respectively, compared to 19 per cent for Estonia. 

Chris Giles

The 2010 emergency Budget has lived up to its historic billing. Huge spending cuts and big tax rises are planned to bring borrowing down from its current rate in excess of 10 per cent of national income.

No allowance has been given to those who worry that such rapid deficit reduction might hit the economy too hard and make it counter-productive. We are back to Lord Snowden’s in 1931, described as an “evangelical Pennine socialist” by Lord Jenkins. I don’t think that description applies to George Osborne; and he must hope his reputation survives better than his 1930s predecessor. Here are four things that have interested me so far.

  • The big news. Obviously, real spending cuts of 25 per cent in government departments outside health and overseas aid are big. Very big. This will mean the pain from this Budget will be felt for years and not just tonight. The really interesting thing is that

 

Has anyone noticed how Europe’s fiscal sinners aren’t faring too well in the World cup, while fiscal saints enjoy a winning streak? Well, a back of the envelope calculation has shown a 70 per cent correlation. By this logic, Estonia should have made it to the final.

Switzerland’s win is best described as reward for prudence, while England’s dismal draw against the US is divine retribution for years of overspending. Who said there was no justice? 

Chris Giles

Sterling is being sold across the board. At lunchtime it was down almost 2 per cent against the currencies of Britain’s main trading partners. There are a bunch of technical reasons why it seems to be in freefall. Figures from the Chicago Mercantile Exchange suggest traders are building up short positions in sterling, the news that Prudential has agreed to buy the Asian operations of AIG insurance group for $35.5bn will create a significant new demand for foreign currency, and the FT’s story today that gilts are trading as if it has already lost the prized AAA_rated status have all put the skids Britain’s currency.

But the big concern in the markets is the chance of a hung Parliament after weekend opinion polls put the Conservative lead over Labour at only 2 per cent. On a uniform swing, this would not be far from sufficient for a majority Conservative government and would indicate a minority Labour administration is most likely. The fear is that such a government would be weak and indecisive in reducing the budget deficit, leading to further economic chaos. 

Robin Harding

Dylan Grice of the Societe Generale strategy team put a punchy note out yesterday on the Japan-national-debt-default-or-hyperinflation theme that occurs when one looks at forecasts of 2010 government net and gross debt of 115 per cent and 227 per cent of GDP.

Here’s a taster (the note has also been written up in apocalyptic tones today by Ambrose Evans-Pritchard of the Telegraph).

Japan’s government borrows from Japanese households and has done for decades. But Japanese households are retiring, and traditionally retirees run down their savings. So who will fund Japan’s future deficits, which are already within the range identified by inflation historian Peter Bernholz as hyperinflation ‘red flags’? Twenty years ago, who could predict long-term JGB yields below 1%? Who sees uncontrolled inflation as the primary risk facing Japan today?

Government debt cannot rise indefinitely as a share of GDP, while the greater the stock of debt and the greater the flow in any given year, the greater the chance of a crisis. I don’t agree, however, that (a) Japan is about to run out of domestic savings to fund its deficit or that (b) the most likely nature of the final crisis is hyperinflation.

As Mr Grice argues, Japan’s household savings are in decline as the population ages. Governments that need to borrow from overseas – most seriously those that need to borrow in a currency they cannot print – are in much greater danger of a debt crisis.

Japan is still very far from that position, however. 

Krishna Guha

Did you spot the big hole in the Obama speech on job creation today? Nothing new on small business access to credit – possibly the single biggest obstacle to job creation in the US. This is a huge issue for the economy, the White House and the Fed.

With the Fed rightly withdrawing from sectoral intervention via financial markets now the financial system has normalised, supporting small business access to finance is properly a job for the government.

On paper this is not difficult. The government could provide guarantees to limit losses on small business loans or create a funding vehicle to coinvest in such loans alongside banks (I prefer this route as the taxpayer and the bank would have the same economic interests). 

Mure Dickie

Pity Japan’s Democratic party. When they took power less than three months ago, party heavyweights were hoping to use the fat from a huge stimulus package drawn up by the former ruling Liberal Democratic party to help fund implementation next year of some of their generous manifesto pledges.  

Ralph Atkins

Is the economy doing better in Germany than in France? Or is it the other way around? Third quarter eurozone gross domestic product data indicated it was the former. German GDP rose by 0.7 per cent, compared with a measly 0.3 per cent in France.

But purchasing managers’ indices today still show France doing much better than its larger neighbour. The French composite index – covering manufacturing and services – stood at 59.8 in November. The equivalent reading for Germany was just 53.5. With the exception of a short burst in 2006, French private sector activity is growing at the fastest rate for about nine years 

Mure Dickie

In the great Japanese debate on how to balance the contradictory demands of reining in the deficit and continuing stimulative spending, chalk up another political point for Shizuka Kamei, Japan’s minister for financial services. 

Ralph Atkins

What will the ECB make of the new German government, asks Ralph Atkins in a Financial Times blog