The UK commentariat has been wringing its hands about growth prospects following Tuesday's poor first estimate for 2010q4 GDP (0.5% contraction). Perhaps it's time to ease up on ‘the cuts' and get jobs and growth going, the line goes – as if they are somehow perfect substitutes. S&P's downgrade of Japan's sovereign credit risk, noting the country ‘lacked a coherent strategy' to manage down its debts, should be a reminder that even major economies cannot postpone putting their fiscal houses in order.
True, Japan's forecast overall public debt level (110-200% of GDP depending on whether pension funds are included) is much higher than the UK's (60.8% of GDP). But on the other hand its 2010/11 fiscal deficit is slightly less at 9.1% v our 10.0%. And for 2010 at least, Japan's growth performance is actually forecast to be far superior to the UK's at 4.3% v 1.7% (though further out Japan slips behind us and they also suffered a worse recession in 2009).
How much confidence do you think the markets gained on Japan's fiscal plans when PM Naoto Kan's response to a question on the downgrade was “I just came out of parliament and wasn't aware, so please ask me about it later.”
If you're thinking not much, you could be forgiven for drawing parallel's to the Chancellor's equally facile response to the UK's GDP numbers.
“We will not be blown off course by bad weather,” said Osborne...except as many others have pointed out removing the estimated -0.5pp impact of the snow (which itself seems very large to me) doesn't even get you back to the lowest forecast from economists prior to the announcement (0.2% overall growth).
And the UK wasn't alone in facing terrible December weather. Faisal Islam has highlighted this week Germany's continuing growth despite running out of grit and facing snow disruption, like Britain. Even if you swallow the snow story, why should that be an acceptable explanation? Isn't it shocking that the snow can dent the UK economy so considerably – and following three cold winters in a row and an inability to stop the white stuff falling down again at some point – shouldn't we be worried about it? So whether it was or wasn't 'just' the weather the government's response looks too weak to me.
The bottom line is that the starkness from lacking fiscal credibility is real and a lack of a credible plan has real costs. The Japanese will now pay more for their sovereign debt - and that means more in the way of cuts to real spending to get the deficit and debt back under control - not a situation we want to face.
But the government's responsibilities don't start and end with balancing the budget.
We need credibility on economic policy too. How are we going to generate the growth we need to not only offset the impact of fiscal austerity and but allow Britain to compete in the post financial-crisis world? So far the government doesn't seem to have much of a story to tell. How are we going to boost innovation, start finance flowing properly to business, and enhance the business environment? How are we going to get unemployment down, just as the public sector prepares to lay off hundreds of thousands of workers? And how are we going to do all that with no public money to use?
A bad quarter's data doesn't mean it's time to panic and throw away the fiscal plan. It would be folly to sacrifice our fiscal credibility as Japan should highlight. But it should be a kick in the pants for Osborne and co to get serious about growth and the economic credibility of the UK. There's a lot riding now on Budget 2011's Growth Review.