Situation six months ago was rather different, and senior civil servants were definitely worried that the end of quantitative easing and uncertainty over the election could lead to serious market problems.

But even then, the IfG’s stated position was simply that markets act as the ultimate guarantor of fiscal probity, which in extreme cases leads to loss of domestic fiscal control (as argued by people involved in both the Swedish and Canadian cases).

But as you say, situation for UK is clearly now not as uncertain as it was at the start of the year. All the political parties agreed in the election campaign that some fiscal consolidation is necessary. Assuming this actually occurs, the UK is probably off the fiscal critical list.

As we argued post the election [last slide], the big question going forward is whether the consolidation will be successful enough to return the UK to full fiscal health (the Swedes managed to do this in similar circumstances) or whether we enter a period of chronic fiscal problems.

This latter case has more precedent – prior to both Ireland’s successful consolidation in the 1980s and Canada’s in the 1990s both counties suffered successive in-year deficits, leading to accumulating problems with borrowing rates and debt servicing. Ultimately these market realities generated the political will necessary to return to full fiscal probity, but it took a decade or so.

PS the IfG website is probably not the best place to look for insights on macroeconomics (this is other people’s specialist area), but think there is at least some content (see for example Martin Weale’s presentation [slide 6]) that it would be unfair to label as pure monetarism!

Has to be said, IFG is on a trip of its own on this one. Closer control of government spending in the UK may well be necessary to avoid undermining incentives through higher taxes but the notion that the UK is running any meaningful risk of a ‘buyers strike’ in respect of required government bond sales and that it faces any real risk of sovereign debt problems a la Greece is just nonsense; primarily because the UK is outside the Euro and has no pressing need to raise non-sterling debt.

I clearly remember on at least two separate occasions at the roundtable that extremely credible guests made the point that for the UK, outside the Euro, the mechanics and underlying realities of government finance are different, and the practical fears stated by panel members would not arise. Simply put, The UK has the option of fiscal stimulus in the same way the US has implemented because it can create its own sovereign ‘fiat’ currency, and the risk of inflationary consequences could hardly, at the moment, be lower.

These interventions from roundtable guests were completely blanked by the panel -
not exactly an environment to stimulate enlightening discussion. To be honest I was disappointed with the IFG and came away quite depressed at what I had to, at the least, take as a valid indication of the nature of the debate within UK policy circles.

At a time when in the financial markets you can find, at least if you look in the right places, a high level of debate on the current relevance of Keynesian and monetarist/Chicago school type frameworks, I felt the IFG and other members of the panel were pretty transparently in the monetarist camp.

Come on – you’re better than that!