The most important Budget number
The most important number about today’s Budget is $12.5 trillion. That’s the amount of money the private sector is likely to save around the world this year*.This means that the government can raise the £220bn it plans to borrow in the gilt market merely by attracting 2.5 pence for every pound saved**. This is smaller than the share of the UK in the global economy. It should be quite feasible to achieve this. As Ricardo Caballero has pointed out, the world has a shortage of safe liquid assets. Issuing gilts therefore meets global savers’ needs. This is why the UK - and governments of developed countries generally - has enjoyed very low borrowing costs as debt has soared.This raises a point which the architects of New Labour glossed over. Globalization makes social democracy more feasible, in one respect at least.In globalized capital markets, it’s possible for governments to borrow massively without suffering rising interest rates; no Chancellor could have gotten away with today’s borrowing in the closed-economy world of the 1970s. This means counter-cyclical fiscal policy becomes more possible.This doesn’t necessarily means it’s more effective; the Ricardian objection must still be addressed. Nor does it mean it’s a good thing to lumber future generations with higher debt.Nor does it mean gilt yields will stay low. I suspect there’ll come a time when Asian savers discover better things to do with their money than lend to highly-indebted governments. But this is more likely to happen when the global economic recovery reduces demand for safe assets, and would hit all government bonds.All it means is that there’s a message for left and right. For the right, it means you shouldn’t scare us with stories about a “sea of red ink”. Big borrowing is more feasible, at least in the short-term, than you pretend. I hate to break it to you, but the UK is not the only country in the world. And for the old Guardian-reading left, it means you shouldn’t complain too much about globalization. If it weren’t for this, the government would be unable to borrow as much as it is, and would have to slash public services right now. * Figure 1.15 in the latest IMF World Economic Outlook estimates the global savings ratio will be 22.8% of GDP in 2009, with GDP being $54.9 trillion.** In fact, this is an over-estimate, as perhaps half of the gilts issued might be bought by the Bank of England under its quantitative easing policy.