Monthly Archives: November 2011

The euro currency may soon collapse even though there is no fundamental reason for it to fail. Everything depends on Italy, because financial markets now fear that it may be insolvent. If the Italian government has to continue paying a seven or even eight per cent interest rate to finance its debt, the country’s total debt will grow faster than its annual output and therefore faster than its ability to service that debt. If investors expect that to persist, they will stop lending to Italy. At that point, it will be forced to leave the euro. And if it does, the value of the “new lira” will reduce the price of Italian goods in general and Italian exports in particular. The resulting competitive pressure could then force France to leave the euro as well, bringing the monetary union to an end.

But this need not happen. Italy can save both its own economic sovereignty and the euro if it acts decisively and quickly to convince the financial markets that it will balance its budget and increase its rate of economic growth so that the ratio of its public debt to its gross domestic product will decline in a steady and predictable way.

Moreover, Italy can do all of this itself. It does not need assistance from Frankfurt, Brussels, or Washington. The proposed policies for help from the European Central Bank, the European Commission, and the International Monetary Fund would ultimately weaken Italy and undermine its economic independence. But impatience and skepticism in financial markets may cause a deeper financial crisis before Italy has time to prove itself. Read more

George Osborne has a tricky task in front of Parliament on Tuesday. He will have to admit to a much gloomier outlook, while sticking to the multi-year deficit reduction plan that he laid out last spring. His challenge is to square this circle credibly.

The new OBR forecast is certain to show a lower growth profile for the economy than that of the March budget. Quarterly outputs have been weaker and employment growth has stalled. Banks are rebuilding their balance sheets but lending to small businesses is still weak. The eurozone crisis has deepened, with a resolution not yet in sight. With such an unrelentingly negative backdrop, it is no wonder that business and consumer confidence are sinking.

Restoring confidence and reassuring the markets should be Mr Osborne’s twin objectives. A two-pronged approach will be necessary. Confidence can be built by laying out a medium-term growth strategy based on an investment revival. The markets can be reassured by stressing fiscal policy stability in the UK, which contrasts so strikingly with the policy uncertainty and political turbulence abroad.

Policy stability means sticking to the announced public expenditure cuts and pension reforms that will have a big cumulative impact on curbing government debt. It does not mean inaction or callousness in the face of slower growth. A tight fiscal stance provides the space for the Bank of England to continue with a loose monetary policy. It will help cushion the effects of the downturn. But just as Gordon Brown’s watchword while he was chancellor was ‘prudence’, Mr Osborne’s should be ‘stability’. Only time will tell if he lives up to his word better than Mr Brown did. Read more

It is increasingly clear that Italy’s public debt is unsustainable and needs an orderly restructuring to avert a disorderly default. With public debt at 120 per cent of gross domestic product, real interest rates close to five per cent and zero growth, Italy would need a primary surplus of five per cent of gross domestic product – not the current near-zero – merely to stabilise its debt. Soon real rates will be higher and growth negative. Moreover, the austerity that the European Central Bank and Germany are imposing on Italy will turn recession into depression.

The country’s public debt needs to be reduced now to at worst 90 per cent of GDP from the current 120 per cent. This could be done by offering investors the choice to exchange their securities either for a par bond or for a discount bond that has a face value reduction of 25 per cent. The par bond would suit banks that hold bonds to maturity and don’t mark to market. There should be a credible commitment not to pay investors who hold out against participating in the offer – even if this triggers the payment of credit default swaps.

But even a debt restructuring would not resolve Italy’s problems of lack of growth and outright recession, lack of competitiveness and a large current account deficit. Tackling those requires a real depreciation that may well demand the eventual exit of Italy and other member states from the euro. Read more

Europe’s leaders may still harbour secret hopes that the European Central Bank will come to their rescue, but at least they seem to have understood that the surest way to make that happen is to deliver on what they have responsibility for, starting with budgets. Fiscal union is now officially on the European agenda.

The debate on fiscal union is bound to involve discussion about the issuance of eurozone bonds. Ideally, the scheme for issuing these bonds would ensure that in order to be attractive to overseas investors they are at least as safe as and more liquid than existing high-quality government bonds. It should also involve incentives to fiscal discipline so that participating governments contribute to keeping the new bonds on a sound footing.

A number of plans have been proposed. None are perfect but they deserve serious consideration to help the eurozone out of this crisis.  Read more

Britain is not Italy, Greece or Spain. George Osborne will want us to cling to that thought when on Tuesday the chancellor of the exchequer gives parliament his assessment of the economy. Whereas those countries are paying about 7 per cent for new debt, the UK borrows at about 2 per cent. While some of our continental neighbours contemplate economic ruin, we have no difficulty in funding our deficit.

However, the government hardly feels comfortable with our economic progress. Spending cuts and tax rises were designed to calm the market and to shrink the state, leaving light and air for the private sector. Mr Osborne always knew that in themselves those measures were insufficient to tackle the deficit. For that we needed growth.

It must cross ministers’ minds that the grim prospect of five years without growth should now be regarded as the most optimistic scenario. It takes no account of what may happen if the euro falls apart in disorder. Now that it is clear that countries such as Spain are paying crippling interest rates precisely because they are shackled to the euro, it is at best perverse to will the currency to survive, and at worst immoral, given the impact on unemployment and other human miseries. Read more

Just when you think the European crisis cannot get much worse, Wednesday’s shunned Bund auction showed that it can. With this, the risks for the global economy as a whole, and for virtually every country, increase materially.

Europe must still stabilise its sovereign debt situation. But this is now far from sufficient. Policymakers must also move quickly to contain banking sector frailties, and do so using a more coherent approach to the trio of capital, asset quality and liquidity. In the eyes of the markets, the capital cushion of Europe’s banking system as a whole is no longer sufficient to support its balance sheet. This concern is not limited to the markets. Judging from their eagerness to dispose of assets, bank managements also believe that balance sheet delevering is key to the institutions’ survival and wellbeing.

Europe must now go well beyond the steps proposed at the October 26 summit. In addition to specifying higher prudential capital ratios, governments must now bully banks to act immediately. Denial, obfuscation and further dithering by policymakers serves only to make the situation even more daunting, and the eurozone’s future more uncertain. Read more

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There was a time when European summits would provide glimpses of the future world order. Those times are gone. Today, those searching for portents of thing to come will have to look at East Asian Summits, like the one that just ended in Bali, Indonesia. The US and Russia participated for the first time. The Association of Southeast Asian Nations, the hosts of the EAS, did not push for their participation. Instead, both asked to be invited. Why did the Washington decide to add another overseas summit to the Barack Obama’s already heavy schedule? The answer is China.

Throughout history, the most important geopolitical relationship has been between the world’s greatest power – currently the US – and the world’s greatest emerging power – currently China. Normally, we should have seen rising geopolitical tensions between the two. Instead, we have witnessed unusual calm. But that era is now coming to an end. For years, China tried to avoid waking up the American “sleeping tiger”. Now the tiger is stirring. A new great game is beginning. Stay tuned to future EAS meetings to understand our new world. Read more

To many, the budgetary gridlock in the US may appear as intractable as that in Europe. But the reality is that the American situation is vastly more favourable. The reason is that the Congress has already passed laws sufficient to permanently fix its budgetary problem and put the nation’s finances on a stable path. All that is necessary is to do nothing and to let the laws on the books take effect.

Without congressional interference, laws already in force would reduce projected deficits by approximately $5,500bn over the next ten years, plus another $1,000bn in debt service savings. This is not enough to balance the budget, but it is sufficient to stabilise the debt to gross domestic product ratio at its current level of about 60 per cent.

The problem, of course, is that neither Congress nor the White House has shown any inclination to allow the laws on the books to take effect. There are reasonable concerns about allowing a large fiscal contraction to take effect when the economy is still fragile, and it’s not hard to come up with better ways of reducing the deficit than those now scheduled to take effect. The main constraint is politics. With the big scheduled spending cuts and tax increases taking effect in 2013, neither party is anxious to promise specific austerity measures going into next year’s presidential election. Everyone hopes their hand will be strengthened by voters and the burden of fiscal adjustment can be shifted elsewhere. Read more

The current turmoil in the eurozone bonds markets shows striking parallels to the situation in autumn 2008. Then, bank depositors had lost confidence in the stability of the institutions holding their assets, and the threat of a bank-run could only be avoided by comprehensive government guarantees for all banks. Today, we are observing a bond-run: a self-fulfilling crisis of confidence in the stability of most eurozone sovereign borrowers. This is driving long-term rates up, so that for more and more countries a temporary liquidity problem is becoming a permanent solvency problem. As regulators still treat government bonds as the safe core of the financial system, this vicious circle threatens the stability of financial institutions not only in the eurozone but also in the rest of the world. It intensifies the recessionary tendencies in the global economy so that in turn the financial situation of governments becomes worse. It’s a perfect vicious circle.

It can be broken only by stopping the bond-run as soon as possible. The authorities could use the Emergency Financial Stability Fund to enable the European Central Bank to act as a lender of last resort without violating its statutes. The ECB would provide practically unlimited amounts of liquidity while the EFSF guaranteed the ECB against the solvency risks that it would incur.

The recent bond-runs have developed because the authorities hold sharply clashing views on the propriety of bond purchases by the ECB. The Bundesbank has been and remains vociferously opposed. But the deflationary threat is real and is beginning to be recognised even in Germany. The statutes of the ECB call for the maintenance of price stability and that requires equal diligence with regard to inflation and deflation. The asymmetry is not in the statutes of the ECB but in the minds of Germans who have been traumatised by hyperinflation. However, the board of the ECB is an independent authority whose independence has to be respected even by the Bundesbank. Read more

The principal problem facing the US and Europe for the next few years is an output shortfall caused by a lack of demand. Nothing would increase the incomes of all citizens – poor, middle-class and rich – as much as an increase in demand and associated increases in incomes, living standards and confidence in institutions and the future.

It would, however, be a serious mistake to suppose that our problems are only cyclical or amenable to macroeconomic solution. Just as the evolution from an agricultural to an industrial economy has far-reaching implications for almost all institutions, so too does the evolution from an industrial to a knowledge economy. Trends that pre-date the Great Recession will be with us long after any recovery.

The most important of these is the strong shift in the market reward for a small minority of citizens relative to the rewards available to most citizens. According to a recent Congressional Budget Office study, the incomes of the top 1 per cent of the US population, after adjusting for inflation, rose by 275 per cent from 1979 to 2007.

Those who remain serene in the face of these trends or favour policies that would disproportionately cut taxes at the high end assert that snapshot inequality is acceptable as long as there is social mobility within lifetimes and across generations. The reality is that there is too little of both. Read more

The elites didn’t revolt and the people didn’t take to the streets. What ended Silvio Berlusconi’s 17-year run as Italy’s most powerful man was the skyrocketing spread between Italian bonds and the German bunds. Had this stayed at under five per cent, Il Cavaliere would still be in power today.

Mr Berlusconi’s fall is another manifestation of the clash between global money and local politics. George Papandreou’s is another. Mixing the constrains of local politics with the demands of global money creates a witches brew whose effusions can topple governments and shape the global economy. Managing this tension is one of the major challenge of our time.

Money that moves at the speed of light, trade that moves nearby at the speed of cargo containers, governments that move at the speed of politics and labour that does not move much: this is Europe today. There are no easy solutions, no antidote to the problem. But if we are to try to avoid a repeat of the current crisis we must make local politics more attuned to global imperatives and make global finance more responsive to local needs. Read more

The recent assessment of China’s financial stability by the International Monetary Fund highlights increasing vulnerabilities stemming from the government’s role in the lending process, and an inflexible interest rate policy. Those who regard weaknesses in the banking sector as a likely trigger for a financial collapse have railed against China’s negative real interest rates and the speculative activity this has spawned.

But focusing on emerging financial risks is a case of treating the symptoms of the problem, rather than its origins. With its responsibilities for providing a broad range of services for a mixed socialist economy, it is surprising how small China’s budgetary footprint actually is. Beijing has been using the financial system to fund public expenditure needs – many of which are not commercial in nature and would normally be undertaken through the budget. While this was unavoidable in the earlier years, it has turned out to be a politically attractive and effective option in dealing with the volatility of the global economy over the past decade.

As such, these hidden banking losses are actually quasi-fiscal deficits, rather than traditional non-performing loans. While on paper China’s does not run major budgetary deficits, these quasi-fiscal deficits in the banking system have been accumulating over the years, awaiting the time when the non-performing loans are formally recognised and written off. While one cannot dispute that China needs to act on financial reforms, the real challenge is for Beijing to recognise the importance of strengthening its fiscal system to undertake expenditure requirements in a more transparent and potentially less destabilising fashion.  Read more

Japan’s 1.5 per cent rise in output in the third quarter was met with a yawn by the markets. Was this the right reaction? Even though it was 6 per cent on an annualised basis, and therefore impressive compared with the 2.5 per cent growth in the US, and even more so compared to the lower-than one per cent in the eurozone, the markets may be right.

These latest gross domestic product figures will probably encourage analysts to stick with the current broad outlook for next year. It is quite remarkable that on average forecasters expects Japan to be stronger than either the US or the eurozone. In essence, the consensus – as well as depressed equity markets and low bond yields for the G7 countries – expect a “Japanisation” of these countries’ economies. The markets are assuming Japan’s post-tsunami recovery is nothing other than a recalibration for lost GDP, and that the rest of the G7 will join Japan in years of dull, or worse, growth.

I am not so sure about a number of aspects of this outlook. Japan is still recovering following the 2008 global financial crisis and the tsunami. Its equity market is cheap and attractive. But the Yen needs to weaken, which it will do as soon as markets realise America isn’t going down Japan’s path. Read more

The Occupy Wall Street movement is a symptom of a growing public disquiet about the workings of market capitalism. As such, Monday night’s decision to close down the camp in New York City is unlikely to check the protests: if anything, the reverse may be true. The two assumptions that public support for free markets is based on – that they deliver more efficient outcomes than the alternatives and that over time they create increased prosperity for society at large – have taken a severe jolt in the past few years.

Capitalism is now approaching a kind of tipping point, away from the winner takes all culture of the past three decades. If left unchecked, public disquiet will sooner or later bring a political response, maybe in the form of much more aggressive regulations and progressive tax systems. These could be at least as damaging as the free market fundamentalism that they would seek to replace.

Much better for business itself to recognise that it has a real economic interest in the well-being of the societies in which it operates; that success or failure is not just determined by earnings per share or profits per partner; and that a successful market economy has to be built on a degree of trust and mutual respect. Capitalism has adapted to changing political and social pressures in the past, and now is time for it to do again. Read more

I don’t know whether to weep or laugh. Eurozone leaders have turned a €50bn Greek solvency problem into a €1,00bn existential crisis for the European Union. Barack Obama cannot remember “whether it was Merkel, Sarkozy or Barroso” who told him, as grand hopes for the Cannes summit turned to dust, “welcome to European politics”. And David Cameron calls on the European Commission – the embodiment of “Brussels” bureaucracy and elitism that his government loves to hate – to prevent the 17 countries of the eurozone running the EU show in their own interests.

The danger of the current situation is that both the eurosceptics and federalists get their way as the union splits between core and periphery. The eurozone does need a stronger centre. That will enlarge the gap between ins and outs, ‘vanguard’ and ‘rearguard’. And the eurozone countries will seek to get their way in the wider EU, or go it alone.

For Britain, it is a fateful development. Governments have sought to prevent a two-speed Europe for 40 years. Edward Heath celebrated our entry into “the framework of a single community”. Margaret Thatcher embraced the deepest of single markets. John Major played with ‘variable geometry’. Tony Blair put it into practice by supporting stronger European foreign, energy and environmental policy from outside the euro. In every case the UK feared a two-speed Europe would leave us in the second division. And we have made the argument that the rest of the EU would be much worse off without us. British politicians must to make the case that Europe is better off with Britain on the inside as passionately as we argue that Britain needs a strong Europe. Read more

With interest rates on its sovereign debt surging well above seven per cent, there is a rising risk that Italy may soon lose market access. Given that it is too-big-to-fail but also too-big-to-save, this could lead to a forced restructuring of its public debt. That would partially address its “stock” problem of large and unsustainable debt but it would not resolve its “flow” problem, a large current account deficit, lack of external competitiveness and a worsening plunge in gross domestic product and economic activity.

To resolve the latter, Italy may, like other periphery countries, need to exit the monetary union and go back to a national currency, thus triggering an effective break-up of the eurozone.

The eurozone can survive with the debt restructuring and exit of a small country such as Greece or Portugal, not major economies such as Italy and/or Spain. Unfortunately this slow-motion train wreck is now increasingly likely. Only if the ECB became an unlimited lender of last resort and cut policy rates to zero, combined with a fall in the value of the euro to parity with the dollar, plus a fiscal stimulus in Germany and the eurozone core while the periphery implements austerity, could we perhaps stop the upcoming disaster. Read more

When it comes to Iran, the best is consistently the enemy of the good. The International Atomic Energy Agency report issued on Tuesday affirms what western governments already know or believe: that for all the sanctions and diplomacy, Iran continues to make steady progress toward producing a nuclear weapon. We might be able to make a deal that would at least bring some Iranian stocks of low-enriched uranium into the custody of a third country – starting a process of multilateral cooperation to meet Iran’s legitimate needs for nuclear fuel, while constraining its illicit activities. This would still leave Iran enough LEU to produce a bomb, and could legitimise its enrichment efforts. That would be bad. But continuing with a policy of sanctions and pressure that is not working is worse.

The Stuxnet worm does appear to have set Iran back, but new generations of cyber-viruses may be easier to defend against. Military action will remain an option, but is not certain to work, and would have deeply counter-productive political effects inside Iran and probably across the Muslim world. That leaves diplomacy.

In 2011, Brazil and Turkey brokered a deal, rejected by western powers, in which Iran would transfer 1,200kg of LEU to Turkey in return for the same quantity of nuclear fuel for a medical research reactor in Tehran. The deal fell through; and an opportunity to work with Iran within a cooperative rather than a coercive frame was lost.

Western governments should now turn back to Turkey and Brazil. Let them initiate a new round of negotiations under UN auspices – with full backing from the US, France, Russia and other powers concerned. At the least, it deprives the Iranian government of its familiar US whipping boy. At most, we might succeed in halting play and then changing the game.

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Here we go again. Europe’s debt crisis has entered a new, more dangerous phase with the yield on Italian 10-year bonds crossing the seven per cent level on Wednesday morning. This is a eurozone-era record that, if sustained, would severely destabilise the debt situation of the world’s third largest bond issuer and one of the original six founders of the modern European project.

Those who lived through the horrid days of the various emerging market debt crises will quickly recognise the factors that have come together in the last few days to form a highly destabilising cocktail. And they may well agree on what needs to be done to stop a bad situation getting worse.

There is only one institution that has an immediately-available balance sheet that could stabilise the situation in the next few days and weeks – the ECB. But before we all join the chorus urging the bank to do more, we should recognise that it, alone, cannot deliver good outcomes. Read more

MF Global is not the first firm to be done in by bad bets in the casino known as Wall Street, nor will it be the last. With many questions still unanswered – perhaps most importantly what exactly happened to the $630m of customer money that was required to remain in segregated accounts – attempting to divine the meaning of its collapse may be premature. But a first rough draft of the meteoric history of the brokerage company offers a few lessons and timely reminders.

This first post-Dodd-Frank failure of a significant financial institution provides an opportunity to assess the quality of regulatory oversight. The judgement may ultimately confirm the fears of those who doubted the efficacy of the recent regulatory reform legislation. Once again, we appear to be confronted by a company that was supervised by a patchwork of regulators, none fully in charge.

Let’s also be careful not to see only what we wish in the MF Global collapse. I reject the notion that this is another example of financial industry compensation run amok. Mr Corzine received a salary of $1.5m, a signing bonus of $1.5m and $11m of stock options, very small beer by Wall Street standards. While it’s unquestionably true that he had more to gain financially from a success with MF Global than he had to lose in its collapse, in the end he lost something far more valuable, he lost his reputation. Read more

Last week’s G20 meeting marked the demise of the eurozone’s three-year effort to save itself. The monetary union will be saved, but not from the inside. Its survival will come at the hands of the International Monetary Fund and the emerging economies.

Europe’s weaknesses were on full display at the meeting in Cannes. Mr Sarkozy did not hesitate to upbraid his Greek and Italian colleagues. Italy’s premier Silvio Berlusconi displayed a further retreat from reality. Ms Merkel, as usual, said very little. The US said even less. The decline of America’s economic power was patent.

The eurozone urgently needs an infusion of financial support from beyond the eurozone, channelled through the IMF. We are at the end of an era, not only in Europe, but globally. The rising economic powers have financial surpluses, economic growth, and high stakes in global stability. They have the means to provide new bulwarks of the multilateral system. The traditional powers will have to make more room for them at the head table. Read more

With leaders of the Group of 20 leading nations now focusing on the International Monetary Fund as their preferred conduit for any bail-out in the eurozone, it is imperative they ask what concrete purpose the fund’s capital will serve. Unless the IMF is granted considerable power to enforce conditionality at the eurozone level, it is hard to see much benefit in its involvement, aside from providing a fig leaf for large-scale European Central Bank purchases of euro sovereign junk bonds.

Perhaps the situation where outside money might be most useful is in preventing bank runs on solvent countries. Unfortunately, however, the distinction between liquidity and solvency is in practice very difficult to make. In spite of its tough reputation, the IMF far more often misjudged solvency problems for liquidity problems than vice versa. Of course, the fund could be used as an enforcement vehicle for imposing conditionality on the south, but the limits of how much austerity can be prescribed are already being tested throughout the periphery.

The risk of contagion from a Greek default is a palpable one. But G20 leaders need to articulate exactly what the IMF can bring to the table that is not already sitting there in front of a very wealthy, but politically dysfunctional, eurozone system. Read more

After George Papandreou’s surprise decision to ask the Greek people if they would prefer five years of austerity or five years of austerity with a side order of chaos, Nicolas Sarkozy’s best-laid plans for Cannes have had to be, well, canned. He launched his presidency of the Group of 20 leading nations with calls for a wholesale reconstruction of the international monetary system and a global plan for renewed growth. These grand aims, some of which were unrealistic anyway, will now inevitably take second place to the eurozone’s worsening agonies, and the visiting Americans and Chinese will inevitably spend time calling on the Old Continent to get its act together.

That is unfortunate, and Mr Sarkozy should try to wrest at least part of the agenda back on to the longer-term issues. Something could be rescued from the wreckage. Of course there will have to be a general commitment to sustaining economic growth. It will only be of value, however, if it is buttressed by specific commitments to strengthen the resources of the International Monetary Fund (and the European financial stability facility) to provide help to the walking wounded, whose problems threaten to derail the summit and, more importantly, the global economy. There is a clear common global interest there, and sometimes peering into the abyss, as the summiteers are now doing, can shift entrenched positions. Read more

The leaders of the group of 20 leading economies first convened almost three years ago to address the financial crisis. As now, there were deep doubts about the financial fundamentals of a major global economy. As now, authorities were struggling to bring Main Street the financial stability it needed, without going too far beyond what it wanted. As now, the immediate challenge was to contain financial panic and the deeper challenge was to lay a foundation for renewed and inclusive prosperity.

The depression that looked possible then has been avoided but the outlook is hardly satisfactory. What can be learned from the last three years as the G20 gathers in Cannes? The world’s leaders, especially the Europeans, will ignore these lessons at their peril. Read more

China is likely to react sympathetically when Europe approaches it for assistance, directly or indirectly. All Brussels has to do to win support is to treat China as pragmatically as it treats Russia. It is striking that Europe does not indulge in ideological grandstanding on democracy and human rights in Russia, but does in China.

A few simple symbolic gestures could win significant favour in Beijing. The EU has so far denied China the status of “market economy”, even though it will gain this automatically in 2015 under current World Trade Organisation agreements. Another possible symbolic gesture is to lift its arms embargo. This does not mean that the EU will begin arms sales to China. That will not happen. But the removal of the embargo would end a humiliating condition imposed on China, and not on Russia.

China has sound geopolitical interests in keeping Europe together. A strong, united Europe provides an alternative economic pole, reducing China’s reliance on the United States. If Brussels is to persuade Beijing to make a substantial commitment to Europe, it has to demonstrate more geopolitical competence – and also more independence in managing relations with China. Read more

Which should come first: growth or austerity?

Debate is raging over whether government policy should favour short-term growth or short-term austerity. The British government has chosen austerity and the bond markets have rewarded it with low interest rates. But, a left-leaning think-tank claims to have the support of “100 leading economists” for its Plan B with higher public spending to boost the economy. Nevertheless, the UK should stick to its current path of cutting deficits.

Britain’s currency is not the global monetary anchor, nor is sterling considered a safe haven in turbulent markets. With a quarter of Britain’s debt held by foreigners, the country’s borrowing costs are directly determined by the confidence that the global bond market has in its policy. Last year 23 per cent of government spending was financed by borrowing. Entitlement programmes consume 29 per cent of the budget and represent the largest component of the structural deficit. Either these must be reduced or taxes will have to be raised. But already tax rates on individuals are among the highest among developed countries. These stark facts are the reason that the coalition government has wisely chosen to put austerity first in order to create the conditions for growth later. Economists may debate, but the markets will decide. Read more