Monday, 9 January 2017

Where we are on the Brexit continuum

Now the many horrors of 2016 are behind us, the world is waking up to the horrors that await in 2017. In particular, the UK is bracing itself for the triggering of Article 50 of the Lisbon Treaty marking the formal notification of Britain’s intention to leave the European Union.

In and of itself, there is no great significance attached to the event. It marks the start of the two year mandated negotiation period, after which either both sides will have reached some sort of agreement, there is a unanimous vote to extend negotiations or Britain is unceremoniously dumped out of the EU and into WTO rules.

Well, that’s a 2019 problem which we’ll have to deal with when we get there. In 2017, the problem facing the UK government is twofold: How to come up with a negotiating platform that leaves open the possibility of a non-disastrous settlement for the UK and how to keep those who voted to Leave onside as the inevitable compromises get struck.

Ah, you’ll hear some say, Prime Minister Theresa May has made clear what her platform is – it’s only desperate Europhile commentators and analysts who are unwilling to listen. She has, these wise heads claim, already stated that she will prioritise control over immigration above membership of Europe’s Single Market and won’t accept anything less than full sovereignty over UK law and regulations.

As she told Sky News over the weekend:

“Often people talk in terms as if somehow we’re leaving the EU but we still want to keep bits of membership of the EU. We’re leaving, we’re coming out, we’re not going to be a member of the EU…We will be able to have control of our borders, control of our laws. This is what people were voting for on June 23rd.”

Given the rest of the EU’s implacable opposition to compromising on the four principle freedoms of capital, goods, services and people it appears the two sides have reached an impasse even before discussions have begun. So is a so-called “hard Brexit” inevitable?

There are a couple of important points worth raising at this juncture that should educate our thinking on the likely stance of UK in Brexit negotiations:
  • Firstly, I think it’s abundantly clear at this point that May’s public discussion of her “red lines”– at least since her speech to the Conservative Party conference last October – are aimed at maintaining the support of the Leave voting constituencies in both the country and her party. This is in no small part to correct the impression that, as a (lukewarm) supporter of the Remain campaign, she was somehow a cuckoo in the nest just waiting for her opportunity to undermine the referendum result. That doesn’t mean she’s not serious, only that it’s an exercise in demonstrating adherence to the principle that says little, if anything, about the process.
  • More importantly, the negotiations are *at a minimum* going to take her up to the end of March 2019 with an election legally required to be called in May 2020 – giving her little time to sell the deal before facing the voters. As such, dressing up awkward compromises – the possible economic hit from losing Single Market membership – as part of her tough negotiating stance rather than the inevitable consequence of the internal inconsistencies of the government’s position (that the “best deal for Britain” may be significantly worse than the one we’re giving up) is a trick worth preparing her audience for.
  • At any rate, whatever “plan” May is putting forward it’s more than likely to be almost entirely irrelevant to the final deal since the UK can’t set the terms of a compromise position. And actually we should make a stronger point here – if the aims are to ensure full control of Britain’s border and the laws and regulations to which the country is subject, then the position is pure fantasy. Sovereignty here would be more accurately defined not by the ability of the UK to set terms of trade and movement of peoples, but as the ability to choose the degree to which it is willing to compromise on those things in order to achieve the Leave camp’s much promised Free Trade Agreements.
  • The reason that Remain voters tend to favour remaining a member of the Single Market is not that they’re na├»ve to the political costs, nor that most would seek to use it as a backdoor route to return to the EU fold, but simply that it offers the type of already existing off-the-shelf framework for a transitional deal. May is correct to say we need to stop discussing Brexit in terms of binary “soft” vs “hard” outcomes – it is a spectrum on which these are simply two points (and neither necessarily the most likely). And we know that the UK is almost certain to require some sort of transitional deal, which a qualified majority of EU member states would have to agree to. It would be a huge ask to begin substantive negotiations on both the long term future of UK-EU relations and complete a bespoke transitional arrangement within the two year timeframe provided by Article 50.
  • Where the Leave camp favouring “hard Brexit” may be right is that it remains entirely unclear whether any deal that seeks to atomise UK-EU relations on a point-by-point basis is even possible. A carve out of freedom of movement for the UK would almost certainly invite similar requests from other member states, with the threat of further withdrawals as the bargaining chip. That is the very last thing EU institutions want to be throwing into the mix with populist nationalism springing up across the region.

So back to the original dilemma – is it conceivable that the Prime Minister could simultaneously maintain the support of her party and voter base as well as providing sufficient compromises to make a non-disastrous deal with the EU?

Sure it is. However, that says nothing of its likelihood. While it is a fair (even necessary) inference of May’s announced position to date that control of EU migration is a “red line” and that the EU would never accept such a demand from any member of the Single Market, it is significant that she would not explicitly state this – despite numerous invitations from Sky’s Sophy Ridge to do just that.

I tend to agree with David Allen Green here; the reason May is reticent in formally declaring willingness to sacrifice Single Market membership is that it is simply not in her gift to make that call (absent not triggering Article 50). Rather, as with most of the key decisions during the negotiations, it is solely a matter of EU discretion. Yet soon it could be incumbent on parliament to vote on whether or not to trigger Article 50 and this question could get asked again…and again…and again.

I don’t think it unhelpful that such pressure be applied in order for there to be proper scrutiny of the process and I think it speaks to the importance of the legal case currently in front of the Supreme Court. The key here is likely not to be the end point of repatriating powers over migration or removing EUCJ oversight, but the route taken to get there. As we have learned from IMF programmes of recent years, the most important thing for major economic adjustments is not only to have the right goals but to ensure that the timing of reforms (be they regulatory, legal or economic) is done in a way that avoids damaging the underlying economy as far as possible.

After the end of March the Prime Minister will inevitably turn her attention away from her domestic audience and towards Brussels, where Sir Tim Barrow is highly unlikely to find his negotiating partners any more generous or the government’s approach any less “muddled” than his predecessor. If, at that point, the best May can offer is “Brexit means Brexit” then I’d suggest the UK is in for a bumpy landing indeed - and all of those who vote in favour of whatever plan is ultimately presented to parliament will be implicated in the result as much as the executive.

Tuesday, 13 December 2016

The Case Against Globalisation Reparations

There are a lot of column inches currently being devoted to an increasingly popular idea: That the benefits of globalisation and free trade haven’t been sufficiently broadly spread and something must be done.

This has been variously conceived in the form “globalisation’s losers”, “Rust Belt rebellion” and “back row kids” and has been placed at the centre of the anti-establishment wave sweeping developed economies. Without wanting to antagonise the no doubt well-meaning authors of such pieces, however, I’m not at all convinced that at this stage addressing national inequality using globalisation reparations frame is a good guide for public policy.

For an example of this argument, see Gavyn Davies recent column in the FT (emphasis mine):

“Economists have now recognised these dangers, and a new consensus has started to emerge. There has been (almost) no change in the overwhelming belief that free trade and globalisation are good things for society as a whole. But it is now much more widely accepted that the losers from these changes can be more numerous, more long lasting and more politically assertive than previously thought.
The new consensus holds that the gains from globalisation can only be defended and extended if the losers are compensated by the winners. Otherwise, pockets of political resistance to the process of globalisation will begin to overwhelm the gainers, even though the latter remain in the majority.”

I think this consensus, if it is such, is not only unhelpful but potentially highly economically and socially corrosive. To see why, you need first to look at what we mean by globalisation losers.

There is little doubt that the most immediate impact of opening up global trade, in particular the emergence of China as a global trade power from the 1990s, was disruptive and ultimately helped drive the dismantling of large sections of the manufacturing base of the developed world. As the FT’s Matt Klein illustrates, although a great deal of US manufacturing jobs would likely have been lost to technological advancement the impact of import competition has also been significant – in the no import competition model Klein suggests the manufacturing workforce could be some 19% bigger than it is today.




But even acknowledging the significant disruptive influence of opening up global trade on huge swathes of domestic industries and communities that relied on them, compensation for globalisation losers remains a poor framework to guide public policy. Where it is useful is in adjusting future approaches to positive supply shocks from free trade, ensuring that re-training programmes are available for affected employees, providing incentives for corporates to re-locate to affected areas, that targeted investment in communities to build long-term assets are considered as well as direct transfers such as unemployment benefits.

Perhaps most importantly, policy needs to insure that income shocks don’t create a vicious cycle of lower asset prices leading to negative equity/high indebtedness and effectively trapping people into poverty.

Yet there is a reason why the rust belt has got its name. In short, these policies weren’t in place early enough to prevent the decline of former industrial towns and cities. Moreover, there is also a consensus among economists that, absent significant import tariffs and quotas providing a substantial self-imposed negative supply shock creating a worse problem than the one you’re trying to solve, there is no way for the US to bring back these manufacturing jobs.

Indeed, large parts of the so-called rust belt are already a fair way into the transition out of industrial decline and integrating well into the modern services economy. The "Rust Belt" states have seen significant net job gains over the past decade, and while the unemployment rate is (on average) somewhat higher than the national average the participation rate in most rust belt states is above the national average in all save Pennsylvania.

That is not to suggest these regions don’t have problems, only that the practical problems they have – urban/rural disparities, poverty, education gaps – are common to a number of areas and communities outside of de-industrialised areas. What proponents of the globalisation reparations argument seem to suggest is that, rather than address those as issues of national importance, we should instead privilege industrial towns because they appear to be angriest about their relative status change.

I am simply not convinced that putting relative status above actual need in a hierarchy of concerns for public policy is either sensible or desirable. And, moreover, it privileges a certain type of disenfranchisement – the decline of the factory worker and their perceived place in the American mythos – over other disadvantaged communities who have long been fighting to close a status and income gap that remains one of the biggest indictments of policy to date.



Indeed, the closing of that gap between the white working class and traditionally marginalised groups may have made that status anxiety all the more acute. And the answer surely cannot be to reopen it simply in order to buy off hostility by the most vocal to globalisation and free trade at the cost of better policy for everyone. Still less is it an argument for pushing back against openness to trade and migration now that the initial costs have already been experienced - guaranteeing only that they will be less able to partake in the benefits of a faster growing, ever-more-integrated global economy.

Doing so would be to compound rather than learn from the mistakes of the recent past.

Wednesday, 17 April 2013

Introducing Pieria

My new site, Pieria, launched last week devoted to improving and expanding the debates in finance and economics. Below is a short summary of what the site is about and what it offers so please do come join the discussion!

What is Pieria?

Pieria is like going to your favourite cafe, if your favourite cafe is frequented by some of the best people in their field; discussing and debating the big issues of the day, a melting pot of ideas, disciplines and points of view. It’s an ongoing conversation and we’ve designed the site to reflect this. 

The main navigation is divided between macro and micro sections, which together give a rounded overview of what’s going on right now in the economy. 

On the homepage you will find the daily ‘HOT TOPICS’ and is a good starting point for exploring the site. These articles combine a briefing report with in-depth commentary on a single key issue that people are talking about or one which we think worthy of wider discussion. 

Hot Topics bring you up to speed on important issues, and provide you with key talking points and plenty of ideas which you can then pass off as your own. 

The main section of the Hot Topic report is entitled ‘what our experts say’ and is made up of key excerpts from conversations we’ve had with our members or from articles they’ve written which you will find in full on their profile pages. This way of working is our take on transparent/conversational journalism, principles which underpin our way of working at Pieria. (See our piece 'Straight from the Source' for more on Pieria.) 

We think of our EXPERTS section as our black book, but it’s your black book also, and it’s woven into the fabric of the site. It works something like this: Experts have their own profile pages where you will find all of their articles, books and journals. They publish material straight to the site and our editorial team curates these where relevant into our homepage and feature stories, linking back to the original document for readers who want more than an overview. It’s a bit more involved in practice, but that’s it in a nutshell. 

And if you want to explore topics in even more depth, then each article is accompanied by recommended reading from our experts, of either books or journals. You can search the LIBRARY for all of the latest and most popular books, and feel free to help us build our bookshelves and let us know in the comment sections which books we may have missed.

READ PIERIA IN YOUR OWN TIME 

More than ever it seems that there isn’t enough time to read everything that you should or would like to read. So we’ve created the news Dashboard to make it easy for you to instantly save articles and books to come back to later. 

So if you've come across an interesting article or book but don’t have time to read it in full, then just click the icon at the top right of the article and it’s saved straight to your reading list or bookshelf. And if you have specific areas of interest then you can also ‘follow’ topics, sections and individual experts to receive live updates to your ‘my feed’ section. Consider the news dashboard your own personal homepage.

We can be found at: http://www.pieria.co.uk

Monday, 1 April 2013

In defence of 'plogs'


It is fair to say that I would not have imagined myself writing a post in defence of the Office for Budget Responsibility. Nevertheless, here I find myself (sort of).

That is not to say I intend to offer any excuses for the OBR’s worryingly poor forecasting record for UK economic output, which have been used all too frequently as a fig-leaf to cover a litany of equally poor policy decisions. Instead I want to defend Robert Chote and his team from a particular charge levelled at them by the FT’s Chris Giles last week.

In an article entitled “How to ‘plog’ the hole in our awful public finances” Giles writes:

“Had the OBR assumed significant spare capacity now alongside extremely weak growth in the economy’s potential output, it could combine a lacklustre forecast for output growth without the assumption that spare capacity would still exist in 2017-18.

The benefit would be a logical and consistent forecast, but the assumptions would come at a cost: the OBR would have been forced to tell the chancellor he needed to raise taxes or cut spending further now. In this world, more of the government’s borrowing would be deemed structural rather than cyclical – meaning it would not disappear automatically when growth resumed.”

Given the OBR’s track record, I can understand Giles’ cynicism over the latest forecasts (even though they have become much more conservative since December). The problem is that the assumption of “extremely weak growth in the economy’s potential output” relies on an extrapolation of the UK’s prospects based on current policy. That is, if we continue to go down the current path the government may ultimately have to cut much deeper in order to hit its own targets.

And here, I think, is the mistake. Current policy has undeniably failed to deliver the recovery expected by the OBR to date. With no meaningful changes to the policy mix it remains difficult to see where the drivers of growth will come from that will allow the economy to grow 1.8% next year and 2.3% in 2015.

Yet I see it as no less of a heroic assumption to claim that there has been permanent output destruction than it is for those on the other side of the debate to suggest that the large output gap can be bridged through better policy. Moreover, as Japan has demonstrated over the past two decades, the sustainability of government finances cannot simply be measured by a country’s net sovereign debt to GDP but in its ability to service it.

Giles suggests that if the OBR had factored in a shallower recovery it might have necessitated  “telling the chancellor he needed more austerity now”. This logic, however, sits uncomfortably with a recent paper released by the IMF on the challenge of debt reduction during fiscal consolidation.

In what could be seen as a shot across the bows for governments trying to cut their way to fiscal sustainability the author’s write:

“[Debt] targeting could be self-defeating: if authorities focus on the short-term behavior of the nominal debt ratio, they may engage in repeated rounds of tightening in an effort to get the debt ratio to converge to the official target, undermining confidence, and setting off a vicious circle of slow growth, deflation, and further tightening.”

The implication is that bringing in new rounds of fiscal consolidation to chase arbitrary targets can damage short-term growth causing the targets to be missed again and necessitating further rounds of cuts. Sure, if the UK’s output capacity has been permanently impaired then reducing the rate of spending may be necessary over the medium term, but establishing how much of the deficit is “structural” and how much “cyclical” seems to me just as impossible a debate to resolve as establishing a consensus for the size of the Output Gap has proven.

Giles claims that the implicit assumption of the OBR’s forecast is that the Bank of England is effectively impotent as it is “unable to eliminate spare capacity in the economy until about 2021”. In effect he goes on to dismiss this idea by suggesting that the reason the output gap cannot be bridged through monetary policy is that some output has been permanently lost, therefore is “structural”.

There is, however, another plausible option. With monetary policy already bumping up against the zero lower bound and most of the extraordinary measures brought in (such as quantitative easing) limited in their impact by a damaged financial sector the idea of constraints on monetary policy is far from fanciful.

If the transmission mechanisms of monetary policy are impaired, then the impact on the real economy is likely to be muted. Yet one effect that the BoE’s asset purchase programme has had is in reducing the cost of government borrowing and, through its de facto guarantee to act as buyer of last resort, has also helped to invert the impact of economic weakness on government bond yields.

This has left a potential avenue of central bank policy into the real economy – government investment. Unfortunately it was precisely the assumption that fiscal policy could do nothing to aid Britain’s growth prospects that lead to the Coalition’s austerity policies and appears the tacit position in Giles’ thinking.

Yet as Brad DeLong wrote in a Brookings paper last year:

“[In] a depressed economy, with short-term safe nominal interest rates at their zero lower bound and with monetary authorities committed to keeping them there for a considerable period of time, the policy-relevant [fiscal] multiplier is likely to be larger than econometric estimates based on times when the zero nominal lower bound does not hold would suggest.”

As DeLong’s paper suggests one of the best ways to ensure that the damage from an economic crisis becomes permanent is to allow cyclical unemployment to become structural. If the lesson policymakers take from deteriorating OBR forecasts is that they should do more of current policy then we may have lots to fear indeed.

Tuesday, 19 March 2013

Cyprus - Beware False Equivalence


Empathy: The ability to imagine oneself in another’s place and understand the other’s feelings, desires, ideas, and actions.

When faced with an example of injustice it is a common psychological trait to relate the suffering of others to our own experiences. While this can be helpful in fostering greater insight into the personal hardships they may be undergoing it can also cause people to prioritise the similarities of their situations and underplay the differences.

It is in this light that I view attempts to liken the haircuts to Cypriot depositors to ultra-low interest rates in Britain. Yet to my mind this false equivalence does a disservice to understandably panicked depositors in Cyprus and causes undue concern for savers in the UK.

I first came across this particular line of argument on twitter in a tweet from Ros Altmann, former director general of Saga and pensions expert. She wrote:

“UK vs. Cyprus - Sterling devaluation +inflation +ultra-low rates have been stealth tax on savers, to help borrowers and banks”

Altmann went on to point out that UK monetary policy has cost savers more than 20% in real terms since 2008 inflation peak. And she is far from alone in her concerns. Many joined her in her staunch defence of savers against the clawing hands of the Bank of England.

Now I’m not actually disputing the facts as presented. Both savings and real incomes have been clobbered since the crisis by a combination of near-zero interest rates, modest wage rises and above-target inflation. The question is whether this combination of factors can be compared with a sudden seizure of deposits by the state.

This is an important question to answer as the critics are bringing into question the legitimacy of policies brought in to address the crisis. So is the UK really taking money from savers in order to pay for the pre-crisis excesses?

It is certainly true that saving and incomes have fallen sharply in real terms over the crisis. To my mind, however, the question misframes the problem and obscures the purpose of current monetary policy.

During “normal” times when the economy is growing interest rates are certainly higher. Yet the reason for this is not simply to reward savers for their frugality but to incentivise holding back cash in bank accounts and disincentivise heavy borrowing in order to prevent the economy from overheating and driving up inflation.

As a consequence of the so-called “Great Moderation” savers got used to these higher interest rates. This was understandable with politicians unwisely boasting that they had ended boom-and-bust economics. But the fundamental truth remained that high interest rates reflected the central bank’s attempt to hold inflation around target, not to protect the purchasing power of savers.

When the Great Recession struck, therefore, central banks responded to the economic shock by dropping interest rates. This had a number of potential benefits. Initially low rates prevented a cascade of disorderly defaults by allowing struggling companies to refinance at lower rates and encouraged stronger firms to take on more debt.

However, they also caused the rate of interest paid on cash held in people’s bank accounts to fall. This is quite a deliberate aspect of the policy as it should prompt savers to move some of their money either into current spending or investments, which helps boost the velocity of money in an economy (and therefore GDP).

That it is an intentional effect of monetary policy does not make it a Machiavellian plot to steal people’s savings. Instead it should be viewed as a good reason to move money into a portfolio of financial assets that should benefit in the case of an economic recovery or to bring forward already planned spending.

In fact some academics, including Professor Miles Kimball of the University of Michigan, believe that current interest rates remain too high. Kimball has advocated negative nominal rates whereby central banks could in effect impose a charge on cash holdings.

In a recent post on her blog FT Alphaville’s Izabella Kaminska says the Cyprus bank levy represents a harsh example of a negative interest rate. She writes:

“This is the ultimate negative interest rate because it shows that the privilege of having deposits (delaying spending) is associated with principal loss, from the offset.

Which is why negative interest rates, as I have long argued, are a bad omen for the banking model. They show banks have become redundant and that sound equity is more desirable than deposits or weak equity.

Deposits have always represented a store of value. Rather than spending (redeeming your money, which is national equity) on goods or assets which are consumed or depreciate or perish over time you can artificially extend the life associated with your share or the real economy’s wealth by turning your stake into deposits (loanable funds).

The fact that deposits are now depreciating more quickly than real assets only implies there is no longer any sense in delaying spending.

Better to spend now on good equity or goods than be lumped with disappearing equity.”

In terms of the implications of negative rates for the banking sector, Kaminska certainly raises some fascinating points but I don’t agree on the particular charge that the Cyprus levy is representative of what the policy would look like in practice. And this goes to the heart of the debate about UK monetary policy.

With a mix of above-target inflation and ultra-low interest rates UK savers are facing an environment negative real rates. Yet unlike their Cypriot counterparts British savers have the choice of where, when and whether to move their money out of their bank accounts. That they have not been doing so on a larger scale is indicative of a failure to explain the consequences of the current policy mix to the public.

Raising rates while the economy is still weak and companies (including banks) are in the process of deleveraging could raise the spectre of disorderly defaults and an increase in bankruptcies. Those campaigning for policymakers to protect savers need to look at the systemic implications of their proposed solutions.

Of course none of this should reduce our sympathy for Cypriot depositors who have found themselves caught up in a political standoff that they have no control over.

Monday, 11 March 2013

Weak sterling is a reflection of a weak economy, not a policy objective


As sterling hits another new low against the dollar many have started question whether the supposed benefits of a weak currency have been overstated.

Among the voices within the sceptic camp is Andrew Sentance, former Monetary Policy Committee member and currently senior economic adviser at PWC. In a recent blog post Sentance suggests that while Britain’s economic weakness and reduced fear over a eurozone collapse have both played their part in lowering the value of sterling, there has also been a concerted effort by policymakers to “talk down the pound”.

He writes:

“[A] weak pound appears to be an important ingredient of official economic policy. Government ministers, including the Chancellor, have talked of rebalancing the economy and emphasised the role of a competitive currency in achieving this. The Governor of the Bank of England has argued along the same lines. In his major speech earlier this week, he argued that the 25% fall in the value of the pound was “certainly necessary for a full rebalancing of our economy”.”

In order to understand his point we need to look at the measures taken by the government and the Bank. It is certainly the case that under normal circumstances a central bank issuing £375 billion of new money into an economy might be expected to lower the exchange rate value of a currency.

However, this idea relies on the notion that the Bank of England has somehow managed to outcompete other central banks through its easing programme. The figures would suggest that this is far from the case.

It is undeniably true that the Bank’s balance sheet has swelled to around £400 billion but this is dwarfed by the Federal Reserve’s $2.92 trillion (£1.96 trillion) or the European Central Bank’s €2.77 trillion (£2.42 trillion). Moreover, unlike its American counterpart, the Bank has resisted increasing its stock of asset purchases since the £50 billion boost last July.



In fact sterling’s recent falls against the dollar have predominantly been a 2013 phenomenon, after the latest batch of asset purchases had already ceased (see chart below).



To claim that Mervyn King has managed to influence its trajectory you have to believe that foreign exchange markets are reading the tea leaves of future policy rather than responding to central bank actions. Otherwise the dollar would surely be in freefall after the Fed’s announcement of “Unlimited QE” in September last year that will see the balance sheet grow by $85 billion a month until unemployment falls below 6.5%.

For those who support the notion of rational markets is it not more likely that markets are instead responding to repeated demonstrations of Britain’s economic fragility?

Official figures suggest the UK saw a meagre 0.2 per cent growth last year versus a 2.2 per cent rise in the US’s national output. This disappointing economic performance has undermined government efforts to improve the national finances and, much to the chagrin of the Chancellor, cost Britain its AAA rating from Moody’s last month.



Here a report from the International Monetary Fund (IMF) last week could perhaps shed some light on why the UK has fared so badly in the post financial crisis environment. Building on the Fund's earlier work on fiscal multipliers, it suggests that key forecasts for the effects of government cuts may have been optimistic and that the actual impact of fiscal tightening policies have been much more severe than anticipated:

“The negative impact of fiscal tightening on economic activity in the near term is indeed amplified by some features of the current environment, including the proportion of credit-constrained agents, the depressed external demand, and the limited room for monetary policy to be more accommodative…It may also lead country authorities to engage in repeated rounds of tightening in an effort to get the debt ratio to converge to the official target. Not explicitly taking into account multipliers or underestimating their value may lead policymakers to set unachievable debt targets and miscalculate the amount of adjustment necessary to bring the debt ratio down.”

It should be noted that the paper is not a critique of the UK government’s plan and indeed the authors are keen to stress that it does not make a comprehensive case against fiscal consolidation. Rather it serves as a warning that under current circumstances cutting government spending can significantly lower output in the short term and worsen a nation’s debt dynamics before it improves them.

From this line of argument one could perhaps conclude that if George Osborne chooses to continue with current policy in his Budget then he is indeed targeting weaker sterling in the short term in order to prompt a sharp boost to the UK's trade balance. If so he might consider listening to Sentance’s warning that “exporters in a mature industrialised economy like the UK do not respond to short-term currency movements in this way”.

As he says, businesses need the longer-term reassurance of strong, stable demand for their products in existing markets before they look to expand operations elsewhere. If the fiscal multiplier is high then far from promoting an export-led recovery government cuts may be helping to erode confidence and force the private sector into its own bout of consolidation.

Weak sterling is not a policy objective, save as a get-out-of-jail-free card for politicians wedded to the dogma of austerity. So far it has failed to provide even that.