deep cut, recognizing
exceptional circumstances. I called for a rate cut of 2 per cent. The Bank of England got there in stages, helped by a concerted
0.5 per cent cut agreed between central banks in October 2008, followed by a unilateral cut of 1.5 per cent, to 3 per cent,
in November, and a further cut to 2 per cent in December. These cuts undoubtedly had an impact, but in the short run the normal
transmission mechanism had largely broken down. The credit crunch was restricting the supply of credit, whatever the price.
Monetary authorities in the UK and elsewhere recognized that parallel action was necessary to restore normal bank lending,
involving unorthodox measures to boost the supply of money, as discussed in chapter 7 .
There has been more controversy over whether it is also necessary to stimulate the economy by running a larger budget deficit.
This is already happening automatically, since as the economy slows there will be weaker tax receipts from personal and corporate
income, VAT and stamp duty. But there is anxiety that, even without the impact of recession, the government has been running
an excessive, structural, deficit. The OECD, among others, was very critical of the British government’s gradual drift into
larger, unplanned deficits, even before the problem of the recession arose. In December 2008 there was an increasingly polarized
debate about whether Britain’s public finances were strong enough to permit a small fiscal stimulus, of around 1 per cent
of GDP, on top of a current (that is, excluding public investment) deficit of 9 per cent of GDP, expected in any event. Critics
argue that if thegovernment’s borrowing requirement spirals out of control, then the cost of borrowing in international markets will rise on
the fear of sovereign default, perhaps in a dramatic way.
The issue of managing the public sector deficit is emerging as a central issue in economic policy, and in politics. As it
happens, the government is experiencing no serious difficulty in marketing government gilts, despite very low interest rates
(less than 2 per cent in real terms). And the current, outstanding, UK public debt is moderate in comparison with those of
other countries, or with much of the last two centuries. The overwhelming consensus among economic analysts and policy makers
is that the government (and other governments) has been right to maintain expansionary policies and to run large fiscal deficits
throughout the crisis (which is not yet over), and that conservative critics have been wrong. The point may, however, be approaching
at which it is necessary to signal to the markets that, as the threat of a major slump recedes and recession is abating, the
government has clear plans to cut its borrowing, which is now, at 13–14 per cent of GDP, at a level that would be seen as
absolutely extraordinary in normal times.
Because so much of the uncertainty and worry besetting the UK economy has centred on the housing market, there has also been
an argument to the effect that any attempt to rescue the economy from a downward spiral of declining confidence, declining
spending, and declining activity should centre on shoring up house prices. The banks, as well as builders and property owners,
are, unsurprisingly, proponents of this approach. Various ideas have been canvassed, including direct or indirect state guarantees
for new loans, stamp duty suspension or reduction, or the state funding of mortgage arrears through the benefits system. A
moderate reduction in stamp duty was attempted in September 2008 and sank without trace. There has also been a modest programme
to assist people who are out of work to pay their mortgages. But the government and the Bank of England have essentially declined
any suggestions that they should stop thehousing market adjusting through a substantial fall in prices. This adjustment is now taking place, although there is the
danger of
exceptional circumstances. I called for a rate cut of 2 per cent. The Bank of England got there in stages, helped by a concerted
0.5 per cent cut agreed between central banks in October 2008, followed by a unilateral cut of 1.5 per cent, to 3 per cent,
in November, and a further cut to 2 per cent in December. These cuts undoubtedly had an impact, but in the short run the normal
transmission mechanism had largely broken down. The credit crunch was restricting the supply of credit, whatever the price.
Monetary authorities in the UK and elsewhere recognized that parallel action was necessary to restore normal bank lending,
involving unorthodox measures to boost the supply of money, as discussed in chapter 7 .
There has been more controversy over whether it is also necessary to stimulate the economy by running a larger budget deficit.
This is already happening automatically, since as the economy slows there will be weaker tax receipts from personal and corporate
income, VAT and stamp duty. But there is anxiety that, even without the impact of recession, the government has been running
an excessive, structural, deficit. The OECD, among others, was very critical of the British government’s gradual drift into
larger, unplanned deficits, even before the problem of the recession arose. In December 2008 there was an increasingly polarized
debate about whether Britain’s public finances were strong enough to permit a small fiscal stimulus, of around 1 per cent
of GDP, on top of a current (that is, excluding public investment) deficit of 9 per cent of GDP, expected in any event. Critics
argue that if thegovernment’s borrowing requirement spirals out of control, then the cost of borrowing in international markets will rise on
the fear of sovereign default, perhaps in a dramatic way.
The issue of managing the public sector deficit is emerging as a central issue in economic policy, and in politics. As it
happens, the government is experiencing no serious difficulty in marketing government gilts, despite very low interest rates
(less than 2 per cent in real terms). And the current, outstanding, UK public debt is moderate in comparison with those of
other countries, or with much of the last two centuries. The overwhelming consensus among economic analysts and policy makers
is that the government (and other governments) has been right to maintain expansionary policies and to run large fiscal deficits
throughout the crisis (which is not yet over), and that conservative critics have been wrong. The point may, however, be approaching
at which it is necessary to signal to the markets that, as the threat of a major slump recedes and recession is abating, the
government has clear plans to cut its borrowing, which is now, at 13–14 per cent of GDP, at a level that would be seen as
absolutely extraordinary in normal times.
Because so much of the uncertainty and worry besetting the UK economy has centred on the housing market, there has also been
an argument to the effect that any attempt to rescue the economy from a downward spiral of declining confidence, declining
spending, and declining activity should centre on shoring up house prices. The banks, as well as builders and property owners,
are, unsurprisingly, proponents of this approach. Various ideas have been canvassed, including direct or indirect state guarantees
for new loans, stamp duty suspension or reduction, or the state funding of mortgage arrears through the benefits system. A
moderate reduction in stamp duty was attempted in September 2008 and sank without trace. There has also been a modest programme
to assist people who are out of work to pay their mortgages. But the government and the Bank of England have essentially declined
any suggestions that they should stop thehousing market adjusting through a substantial fall in prices. This adjustment is now taking place, although there is the
danger of
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