The Tories, the debt and ‘the markets’
Paul noted recently that Philip Hammond got a little confused on TV.
Hammond was trotting out the new Tory line that we need to be tough on spending to appease ‘the markets’.
Last autumn, around the time of the stimulus package, the right wing line was that this would cause the markets to stop funding the UK government or that Sterling would ‘crash’.
The same lines re-appeared around budget time.
Sadly for the Tories, the crash didn’t happen. So now, with a wonderful twist, they are peddling the line that the only reason ‘the markets’ haven’t lost faith in the UK is the prospect of a Tory Government.
In this were the case (that the markets were happy lending to the UK, due to the prospect of a Tory regime) the cost of borrowing would surely be related to the likelihood of a Cameron government.
The chart below does indeed show some correlation.
Are the Tories right then? Not really. Not unless the prospect of a Tory government is somehow holding down US bond yields too:
Cameron/Osborne/Hammond might be really into cutting, but I doubt they’ll make much impact on the US Federal Deficit.
There are a vast number of factors that determine yields – the expected rate of inflation, the likely course of short term interest rates, the perceived strength of the economy, the attractiveness of other assets – not to mention technical reasons such as pension funds matching their liabilities to long term, stable assets.
The Tories either know this and are being willfully dishonest or they don’t. Which would be kinda scary.