Jonathan Todd

On 11 September 2010 I made this comment on Labour Uncut:

“George Osborne won’t say this but the only “plan B” that he seems to have is to look to the Bank of England for more monetary easing, which will have to come in the form of quantitative easing (QE) given how low interest rates are. We live in very uncertain times and it is hard to say where any of this is going. But further quantitative easing on the scale which may become necessary due to Osborne’s early and deep cuts would make it more likely that the “ketchup in a bottle” theory of inflation becomes a reality: all the money that has been printed suddenly catches up with us in the form of inflation. If we were to have double dipped, this would leave us with negative growth and inflation. That’s right, stagflation. Osborne might think his macroeconomics takes us back to Thatcher’s 1980s but stagflation is, of course, the curse of the 1970s.”

I note that 19 days later the Economist reported:

“If the economy stutters … the current plan B relies on monetary policy. The Bank of England is expected to resume the quantitative easing (QE)—injecting money into the economy by buying financial assets—which it stopped earlier this year.”

The Economist concurs with me on the nature of Osborne’s plan B. As he has given himself no room for fiscal manoeuvre, his plan B is to abdicate management of the economy to the Bank of England. They share my concerns about what this plan B may mean for inflation:

“Pumping more money into the economy might jolt up inflation expectations, given that inflation has been above the government’s 2% target for most of the past four years.”

They are also doubtful about the effectiveness of further QE as a stimulus:

“The bigger worry is that, while banks remain so reluctant to lend, more QE will prove inadequate to counter fiscal austerity.”

The Economist goes on to suggest that Osborne may not want to proceed with fiscal tightened at quite the pace he has proposed:

“The overall fiscal consolidation is tilted towards spending cuts, which will account for three-quarters of the deficit reduction by 2014. But next year, tax rises will make up nearly half of it. The main rate of VAT, a consumption tax, will rise in January from 17.5% to 20%, and national-insurance contributions will also go up in April. Depending on what the data show in the coming months, a temporary reprieve on tax rises might be a good idea.”

I’m pleased that my reading of Osborne’s strategy is shared in so many respects by the Economist. We’ll have to wait and see whether he sticks to the dangerous course on which he has embarked. I fear that George may not be for turning.