Monthly Archives: February 2015

Be careful what you wish for…

Careful now…

Politicians frequently make economic rods for their own backs. When good things happen on their watch they claim the credit for them, whether they are responsible for them or not. This, however, leaves them open to getting the blame for the bad things that happen on their watch, whether they are responsible for them or not.

A good recent example was George Osborne’s recent claim that inflation at a 12 year record low showed that “the Government’s long term economic plan is working”. Unless my copy of the coalition’s economic plan is missing a few pages, record low inflation is not part of it. Indeed, for a government still borrowing over £90 billion a year, it might be quite bad news.

Government debt is a stock with a certain nominal value, say, £1 trillion. And if national income in a year is, say, £1 trillion then government debt is 100% of GDP.

If, one year, there was a vast inflation so that nominal GDP doubled to £2 trillion (real GDP is unaffected, there are still as many goods and services, this is a purely monetary effect) while that stock of debt remains unchanged at £1 trillion then government debt as a share of GDP has fallen to 50%. By contrast, a collapse in nominal GDP of 50% over the year would leave that stock of debt at 200% of GDP.

So, whatever it means for the man or woman in the street, for a heavily indebted government a slowing of inflation is a real headache. With the election approaching, Osborne will be grateful for the fact he can now declare the ‘cost of living crisis’ over, at least temporarily. But it’s not the way he’d have wanted it.