Brexit, Osborne and the BoE: inconvenient rules and convenient excuses

George Osborne, the Chancellor, had staked his reputation on returning the UK economy to health after the financial crisis. In doing so he imposed several fiscal rules on himself, which were supposed to showcase his credentials as a responsible Chancellor, in contrast to his Labour predecessors. The problem, however, is that while the public has been fed soundbites about “fixing the roof while the sun shines” and the opposition has attacked the supposedly “savage cuts” to public services, the reality is that Mr Osborne has fallen short of his targets. Last year he activated the get-out clause on his cap on welfare spending. At the Budget in March, it was his promise to cut debt as a share of gross domestic product that was abandoned. Then finally, last Friday he indicated that he would row back on his third and final rule, the promise to balance the government books by 2020.

Officially it was the Brexit vote which prompted the Chancellor to give up on the policy. Before the referendum the Treasury was warning of a recession if the public chose to leave the EU, and even though a promised emergency budget failed to materialise, it was only natural that Mr Osborne would paint a bleak picture of the consequences of the vote. Indeed, a major event like Brexit provides a perfect background to abandon unrealistic policy goals.

Because the reality is that the 2020 target for a budget surplus was never going to be met anyway. The assumptions and creative book-keeping techniques that were required for the target to still be officially in place until last week were astounding. The truth is that the recovery that Britain has seen (and to be fair to Mr Osborne, the UK has fared slightly better than many other Western economies) is built on another bubble and the recovery was already petering out, making the promised budget surplus impossible to achieve without politically unpalatable cuts. Brexit is simply a convenient excuse.

Mr Osborne, however, is not the only one to have abandoned a policy since June 23rd. The Governor of the Bank of England, Mark Carney, revealed this week that he is relaxing some of the tight capital rules on lending which were imposed on banks in the aftermath of the financial crisis, apparently in order for the banks to be able to lend more and so stave off another recession. The counter cyclical capital buffer rate for banks was cut from 0.5% to 0% of their UK exposure, releasing as much as £150bn of additional lending capacity. So the BoE is abandoning the very rules which it designed to avoid banks’ lending too frivolously, as if the rules were meant for the good times, but somehow not necessary when the economic circumstances make it likely that borrowers would actually default. If you ever needed proof that government regulation is a scam, look no further.

It is of course perfectly normal for politicians and bureaucrats to change the rules of the game when reality doesn’t suit them, all the while pretending that some external factor beyond their control is to blame. They get to set the rules and play the game at the same time. So we shouldn’t be surprised. But we can still be annoyed.

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