“The motivation for government spin is obvious enough. On the one hand, rises in market interest rates could be a disaster, given the extent to which British households are leveraged. On the other, implementing the real cuts required to back up a genuine austerity package have proved politically unpalatable.”
Dr Morgan warned that it seemed “improbable” that the bond markets would “continue to fall for this spin-job” and would “sooner rather than later” call the Government to account.
Ministers have insisted that public spending is being cut at a rate not seen since the Second World War and trade unions have launched mass protests about reductions in the public sector. The number of public-sector jobs will have fallen by 700,000 by 2017.
The yields, or interest rates, on government gilts have fallen to record levels which the Government has claimed shows that international financial markets have confidence in the public spending programme.
Sir Mervyn King, the Governor of the Bank of England, recently described the Government’s response to the financial crisis as “textbook”.
However, George Osborne, the Chancellor, has faced calls from right-wing Conservative MPs to speed up the pace of the public spending cuts.
Last year, Mr Osborne announced that the austerity programme would be extended for another two years after poor economic growth meant that the public finances would take longer to recover than previously forecast.
Last weekend, senior former Bank of England figures called on the Government not to increase the scale of public spending cuts.
Sir Howard Davies, the former deputy Governor and head of the Financial Services Authority said: “If the growth rate turns out to be lower than the government expected, then I think that they should accept that, and accept that that means that the deficit is going to be reduced in a longer time period.
“The markets recognise that if the economy turns out weaker than expected and you try to compensate for that by tightening even further, then that way madness lies,”
Marian Bell, a former member of the Monetary Policy committee said: “What matters for the markets is that a medium term consolidation plan is in place. I think the speed is perhaps less important.”