Britain’s borrowing costs have dropped to the lowest in a generation, falling below those of Germany, Europe’s biggest and strongest economy, reflecting in part investor confidence that the government can bring the deficit under control.
George Osborne, the chancellor, vowed on Thursday that he would not retreat on his plans to rein in the deficit, the most ambitious effort to cut public spending announced by any major economy.
Benchmark five-year gilt yields fell to 1.43 percent on Thursday, almost a quarter of a percentage point below those of Germany, which traditionally benefits from much lower interest rate costs, and the lowest level since at least the 1980s.
However, the fall in gilt yields in the wake of the announcement that the government would cut spending and entitlements by £81 billion over four years might also reflect fears that business will stagnate as money is drained from the economy and jobs are lost.
John Wraith, fixed income strategist at Bank of America Merrill Lynch Global Research, said: “The very low yields are good news for the government, signalling more confidence that public borrowing is going to fall. But this is a double-edged sword as it also implies very subdued growth as a result.”
The chancellor’s hawkish stance prompted Moody’s and Fitch, the rating agencies, to reaffirm that they saw no likelihood of Britain’s losing its top-notch triple A credit status as long as the government remained on its deficit reduction course.
Mr Osborne believes that even in the event of a double-dip recession, he would have to maintain fiscal discipline, arguing that it would be necessary to avert renewed concern about Britain’s ability to pay its way.
“The country needs a decisive plan,” he told the BBC.
He said monetary policy rather than fiscal policy was a better way of boosting an ailing economy, implying that a new round of quantitative easing was possible.
“There is, of course, the freedom of the Bank of England to deploy monetary tools as well.”
The political difficulty of selling the spending review was highlighted by a respected and independent think-tank, which challenged messages given by ministers.
While Mr Osborne had insisted that he had found sufficient cuts in welfare budgets to ensure that public services were hit less hard than Labour was intending, analysis by the Institute for Fiscal Studiesdisputed his assertion.
Carl Emmerson, acting IFS director, said Mr Osborne’s claim was misleading because it did not compare like with like.
“Any like-for-like comparison of spending in ‘unprotected areas’ would be higher in 2014–15 under the last [Labour] government’s plans than under the new government’s plans,” Mr Emmerson said.
The IFS also found the deficit reduction plan hit the poor harder than the rich for the vast majority of the population, contradicting the prime minister’s claim on Thursday that richer households “pay most, not just as an amount of cash, they pay more as a percentage of their income, and that is what the definition of what being progressive is”.
The discrepancy arose, the IFS said, because the Treasury missed out many of the measures that hit the poor from its analysis.
Mr Osborne’s £81 billion in cuts includes a squeeze of £18 billion on welfare benefit payments, as he seeks to eliminate the deficit before the next election in 2015.