Tuesday, December 06, 2011

George Osborne has forgotten what Nigel Lawson learned

Last week I argued that the cost of UK government borrowing is determined mainly by wider economic conditions – on an international scale – and that increases in the amount the government is borrowing appears to have had no negative effect on the interest rate paid.

Now, via an FT article by Samuel Brittan, I find I’m in surprising company:

The chancellor’s main argument against fiscal stimulus was that it would raise interest rates and thus be self defeating. … Mr Osborne vastly exaggerates the effect of the UK Budget deficit on long-term rates. He need not take my word for it. Lord Lawson reports that a similar argument was used in the run-up to the tough Geoffrey Howe Budget of 1981. But he later thought better of it. He writes in The View from No.11, published 11 years later: “Long-term interest rates ... are determined by the balance of supply and demand in the capital market. As the capital market was becoming increasingly a single global market the public borrowing in any one country [with the exception of the US] had a correspondingly diminished effect.” He was right second time round.

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