But having established its fiscal and political credibility with financial markets through these structural reforms, it borders on folly for the government not to cash in on some of that credibility by finding a way to combine private capital with additional government borrowing to build a much-needed new airport for London near the mouth of the Thames, widen two-lane roads that now routinely bring traffic to a standstill and build 3 million desperately needed housing units in a market where prices have been pushed up to absurd levels by overpaid hedge fund managers and no-growth local planning commissions.
The argument against these targeted investments is that market credibility is a hard-won prize and that any hint that the government might be wavering on its debt-reduction commitments would jeopardize it.
“Either you believe in rigor or you don’t,” said one top British industry leader.
There are three problems with this logic.
One is that the government has already retreated on its initial plan in lots of small ways, like last week’s announcement by George Osborne, the posh chancellor of the exchequer, that he had withdrawn his proposal for higher sales taxes on blue-collar favorites such as vacation “caravans” and those hot savory pastries — known as “pasties” — sold by street vendors.
Indeed, as Jonathan Portes, director of the National Institute of Economic and Social Research points out, Osborne has already abandoned his original argument that austerity will so bolster consumer and business confidence that it will boost economic growth. His new, more defensive posture is that it won’t detract much from growth.
More to the point, if budget deficits are what you care about, the lack of growth turns out to be an outsize problem given the structure of government finance, with its long debt maturities and heavy reliance on income and sales taxes. Deficits are many times more sensitive to changes in growth rates than to changes in government borrowing rates. For that reason, the government has already acknowledged — with no obvious impact on market confidence — that it will take two years longer than projected to reach its deficit reduction target.
Surely one big reason there has been no impact is that attracting capital, it turns out, is a relative game. Like U.S. Treasurys, British “gilts” have been the beneficiaries of investor flight from Greek, Spanish, Portuguese, Italian and Irish bonds, with rates falling three quarters of a percentage point over the past few months. By any reasonable economic calculation, that ought to give the Cameron government the financial headroom for additional borrowing and investing as long as it holds fast to its structural reforms.
If the economic logic for a change in policy was not compelling enough, you’d think the political logic would be, particularly given the sharp drop in the approval rating for the Cameron government as a result of the slowdown. But apparently that’s not the way it looks through the warped looking-glass of British politics. Anything that smacks of a U-turn on the party’s signature issue might be seen as an un-Thatcher-like sign of weakness, a blow to the pride and vanity of the prime minister and his chancellor, a threat to unity of a conservative party split between pragmatists and ideologues, a victory not for the country or the economy but for the opposition party.
Come to think of it, after you strip away the royal barges and the horse-drawn carriages, it looks and sounds just like American politics.