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March 4, 2010 2:00 am
From Dr Sushil Wadhwani.
Sir, Willem Buiter says in discussing the UK fiscal situation, that while the “best policy is not an immediate fiscal tightening”, he believes that a lack of credibility implies that the markets demand an immediate fiscal contraction (“Lack of fiscal credibility hurts sterling”, March 2).
Therefore, he recommends tightening now. I wonder. First, it is not clear to me that the markets do require an immediate fiscal tightening. They have previously observed premature fiscal contractions aborting a recovery, and understand that a lack of economic growth makes it difficult to achieve fiscal sustainability.
Second, it might be possible to placate the “market gods” by announcing credible measures that cut spending in future years but are unlikely to hurt demand now. An example of such a measure would be to implement an increase in retirement age from, say, 2012 onwards.
Third, since the financial markets are fickle and do not always get it right, it is dangerous to allow them to dictate entirely appropriate fiscal policy.
Wadhwani Asset Management,
London EC4, UK
(Former member of the MPC)
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