The incredible credibility of a failed plan

One of the biggest arguments in economic policy is finally over.

The government says that it mustn’t change course on fiscal policy, because of the danger of losing market confidence and having to pay high rates for its borrowing. Opponents say that these low rates mean that we can afford to borrow more without spooking the markets, and give the stagnant economy a bit of a boost.

In yesterday’s Sunday Telegraph, Liam Halligan quickly, compellingly and accidentally settled this argument:

“Ah, but Britain is a safe haven”, the detractors cry. “Government borrowing costs are low, so we can afford to spend more.”
Where does one start when faced with such nonsense? The UK government can currently borrow cheaply, partly because –when compared with much of the eurozone – we have a reasonably credible fiscal plan. We aren’t sticking to it, of course.

We aren’t sticking to it. This is like saying that the police can trust a witness’s statement because they’ve got a sophisticated new lie detector – although they didn’t use it, of course.

And Halligan’s right that the government’s plan has come unstuck. They’re now facing the prospect of borrowing £200 billion more than planned over five years:

This is not because they’ve got cold feet on the cuts; it’s because the economy is due to grow by less than half the rate they expected:

A plan that’s going hopelessly wrong is not a credible plan. It follows that the reason for the government’s low borrowing rates isn’t faith in its credibility.

No doubt there is a point where the markets would take fright at the amount of government borrowing. But £200 billion extra doesn’t seem to have taken us significantly nearer it. This follows the pattern of late 2008, when an even vaster surge in government borrowing was accompanied by a fall – not a rise – in the rate charged on that borrowing. A major developed economy with control of its own currency, and with relatively low inflation, has to go horrifically wrong before there’s any real risk of a government debt default. We’ve not been anywhere near that point and there’s no sign that we will.