Â鶹¹ÙÍøÊ×Ò³Èë¿Ú

the banks will "pay back the British people". That's up for debate. But the banks are going to help the government pay its bills.

Why? Because one thing we can say for sure about the coming new regulatory regime for banks, it's going to require them to hold a lot more safe, highly liquid assets. And top of the list of safe, highly liquid assets are government bonds - or gilts.

The timing is what you call convenient. Sometime in the near future, banks are surely going to have to start stocking up on gilts in advance of the tighter capital regime - just as the Bank of England is likely to be halting its purchases of gilts under quantitative easing, and the government's Debt Management Office is starting to wonder who on earth is going to buy the stuff instead.

The banks will come running to the rescue. And no-one will be able to cry foul, because it's all in the interests of a return to sound banking. People who think QE is part of a grand conspiracy to prop up the government will have to find place in their theories for the G20's reform of bank capital and liquidity standards as well.

Of course, the commercial banks' purchases of gilts are unlikely to match the £175bn being spent by the Bank. And, as Robert Peston has pointed out, many banks have been stocking up on gilts already. But most think they will need more. Quite a lot more.

In fact, David Miles, a former Morgan Stanley economist , explicitly made the link in , while discussing the possible exit strategy for the bank's policy of quantitative easing. He said a number of interesting things on the subject, but this was what caught my eye:

"Holding more high quality liquid assets is what banks will ultimately need to do. New FSA rules on bank liquidity will come into force gradually over the next few years. They seem likely to mean that UK banks will need to hold significantly more highly liquid assets than they held before the crisis: perhaps in the tens of billions of pounds, or possibly even more. Some City analysts have put the figure in the hundreds of billions rather than tens of billions. For UK banks with largely sterling business it would be natural that a significant proportion of those liquid assets would be in the form of reserves at the Bank of England and gilts. So far sterling liquid assets have been accumulated most rapidly in the form of reserves at the Bank. Further down the road banks may well want to hold more of their sterling liquid assets in gilts and rather less as reserves. This is one way in which QE can naturally roll-off as banks reduce their reserves by buying gilts from the Bank of England."

He goes on to conclude:

"QE helps a transition to something more stable; quite possibly a world where banks do less intermediating between savers and investors and where bank assets are more liquid and their funding more predictable; and they are better capitalised. There are signs that all this is happening - it might have happened anyway but QE is making it easier."

Clearly David Miles is not one of the QE sceptics we hear about (they would scarcely have picked him if he were). He not only thinks QE is good for the economy right now - he also thinks it's good for the long-term health of our financial system.

We want banks to move to a more traditional way of banking, with transparent balance sheets packed with cash and other assets that are easy to explain and even easier to sell. Thanks to quantitative easing, they now have more liquidity than they know what to do with, in the form of enormous excess reserves with the Bank. And when they decide to diversify, very slightly, into gilts - the Bank will have plenty ready to sell.

Banks buying gilts is not at all the same as the "banks paying taxpayers back". But there will be a nice symmetry involved if a return to traditional banking ends up helping governments to service a mountain of public debt - which reckless banking did much to create.

The car industry is delighted that Lord Mandelson has expanded the government's car scrappage scheme. But I'm tempted to say they lobbied the wrong government. Getting Germany to extend its much more generous scheme - which expired at the start of this month - might have done the average British car worker more good.

Consider the arithmetic. The UK now plans to spend another £100m on its scrappage scheme, bringing the grand total to £400m. That sounds exciting until you hear that Germany's scheme cost 5bn euros (£4.6bn). In other words, more than ten times as much. Under the German scheme, to everyone exchanging an old car for a new one. Two million Germans have bought cars under the scheme - compared to 227,000 so far in the UK scheme.

Why does this matter - other than confirming that German governments are a lot more into cars? It matters because some of those new cars being bought in Germany were made in the UK.

Though Germany is a world-beating car exporter, Germany is also Europe's biggest car importer. About 40% of sales last year were imports. But importers have benefitted even more than you might expect from the German car scrappage scheme, because people trading in their clunkers tended to buy smaller, compact cars, which are more often made abroad. In the first few months of the scheme, nearly two-thirds of the cars bought under the German scheme were made overseas.

It hasn't exactly caused a surge in demand for British cars. But according to the HMRC's trade figures, our car imports from Germany in the first seven months of the year were 34% down on the same period of 2008, whereas car exports to Germany "only" fell by 19%.

It's true that we still bought a lot more of their cars than they bought of ours - £3.6bn worth versus £515m. But every little helps. Our car "deficit" with Germany has shrunk by nearly £2bn - from £4.9bn in the first seven months of 2008 to £3.1bn now.

Put it another way: we import around 80% of the cars sold in the UK. So, by a very rough approximation, you could expect that around £45m of the £227m spent on the car scrappage scheme went toward buying a British-made car. (I know that the scheme's supporters point out that some of those cars have UK-made parts, but this calculation is tricky enough already.) By the same logic, the German government appears to have spent about £2.8bn on helping Germans buy foreign cars.

Now the vast majority of those imports weren't British. But if a mere 1.7% of that money was spent on a car made in Britain, the German scheme has made a greater direct contribution to the sale of cars made in the UK than our own government's scheme.

First, it's a reminder that the Germans have done a lot more to boost their economy than their rhetoric would suggest, whereas the British have done a lot less. , you would think that the government planned an enormous boost to the economy next year - which the Conservatives would callously take away. But the IMF estimates that discretionary programs (that is, special policies to combat the recession) will not support the economy at all next year. By contrast, Germany is planning to spend another 2% of national income on boosting growth.

The Germans have a reason for being low-key about their stimulus packages - they think it makes them work better. On their theory, people (German people anyway) will spend more of a given cash windfall if they're not worried about the tax rises to come.

It seems to work for them - the rise in car sales was almost single-handedly responsible for the very modest growth in GDP which Germany achieved in the second quarter of this year. According to Capital Economics, German consumer spending grew by an annual rate of 1.2% in the three months to the end of June, at a time when spending in the UK was falling at an annual rate of 3.4%. Without car sales, spending would have fallen in Germany as well.

Possibly, the average Brit is less likely to lie awake at night worrying about the public finances than his German counterpart. Maybe we get a warm glow from the idea that our government is valiantly running up debt on the economy's behalf. Either way, our government has taken the opposite approach to the Germans. Ministers have endlessly talked up the stimulus, even though by US or even German standards, it was pretty small. We'll never know whether it would have been more effective to play the stimulus down.

Second, it shows us once again, why sometimes it's better to be a spender than a maker.

Almost by definition, countries with big trade deficits will be less affected by a global downturn than countries with big surpluses. Why? Imagine Country X has a 10% of GDP current account deficit - meaning that it only makes 90% of what it consumes. Whereas its neighbour, Country Y, has a 10% of GDP surplus.

Then imagine global demand falls 5% across the board. Other things equal, the country that contributes 110% of its GDP to global supply will be worse hit than the country that only produces 90%. On this example, X faces a hit of 4.5% of GDP versus 5.5% of GDP for country Y. And so exports of Country Y fall more than imports, whereas the opposite will be true for Country X. The numbers are smaller, but this the essence of what has happened in Britain and Germany.

And that's if other things are equal. Country X benefits even more when Y decides to spend £4.6bn boosting domestic demand for imported cars, while its exporters are being hammered by falling foreign demand. Thanks to cash-for-clunkers, German car sales in the year to August are up 27%. By contrast, car exports are 29% down on last year. Though something tells me they'll be back.

An update on my last post - the communique did contain that "high level aspiration" on IMF reform after all.

After a long battle by the US - the leaders agreed to use the 5% figure in relation to reform. But note the careful language: the leaders committed a shift in votes "of at least 5% from over-represented countries to over-represented countries".

So the big European countries aren't necessarily going to lose their permanent seats on the IMF Executive Board. In fact, I'd be amazed if they did.

Most officials I spoke to said the deal was unlikely to be struck by the January 2010 deadline: it's going to be a nightmare to agree.

But we can say right now that it will be a bad time to be small and European.

With just under 5% of votes, the likes of Britain can claim they are not really that over-represented at the Fund - and believe me they have chapter and verse on this for anyone who disagrees. Even though it's obvious that China should have more. It now has 3.6% of votes, for more than a billion people and the second largest economy in the world.

But Belgium has 2% of votes - for a population of 10 million. The Netherlands has 2.6%. The list goes on. It's hard to believe their share will survive the final cut.

Apparently Gordon Brown has a cunning plan that will fix all this and leave everyone happy. It will be interesting to see how that works out.

Despite speculation otherwise, the G20 will not formally announce today that it is replacing the G8 on economic and financial issues. That will only happen in 2011 - when France is chairing both of them.

The leaders would have liked formally to announce the handover today in Pittsburgh, but the Canadians - who are chairing the G8 next year - kicked up such a fuss that they had to fudge it. There will be a G20 meeting on the sidelines of Canada's G8 Summit next June, where most of the economic business of the day will be discussed. But formally speaking, the economic side of the G8 will live on another year.

Of course, in practice, the changover will start at that June meeting. But symbolism counts. The lesson of Pittsburgh is that the old world still can't bring itself to follow through on its inclusive rhetoric.

You may remember this blog is a big fan of the Canadians. But on this matter I clearly misjudged them. Turns out that Canada can be just as single-minded in defence of its historic privileges as everyone else.

But the Europeans shouldn't jump to criticise too quickly. Because if there were a prize for hanging on to anachronistic privileges, it would have to go to them. There's no detail in the communique on the new balance of power at the Fund either. Why? Because the Europeans are holding onto their ludicrous over-representation at the Fund until the bitter end.

There are now 24 members of the Fund's Executive Board. Three of the five permanent members are European. And of the remaining 19, where groups of countries are represented by a single director, seven of the directorships are currently filled by European countries (inside and outside the EU).

So, that's 10 out of 24. In a world in which Europe accounts for less than a fifth of world economic output. France alone now has more IMF votes than China - though its economy is less than half the size.

There is a "high level aspiration" to transfer 5% of the votes from old world to new. But "high level", in this context, means "something we claim to want in private but are not willing to put in writing".

Why? Because the only sensible place to find those votes is in Europe. America's voting share of 17% is controversial because it gives it - and it alone - an effective veto in the board. But at least it's roughly in line with its economic clout.

Of course, it's only a matter of time before the Europeans have to face the realities of the new world order. But one of the less high-minded lessons of today's communique will be that they are going to put it off as long as they possibly can.

The communique will commit them to resolve things by January 2011. But expect plenty of unattractive horse-trading between now and then.

What do the G20 leaders need to achieve today? And will they do it?

, negotiating the roadblocks, devising the shortest trip from hotel to shuttlebus to press room. And so are all the leaders (minus the shuttlebusses) - together again for the third time in less than a year.

You have to wonder: what can they agree in a day of meetings that they couldn't have agreed by phone? One answer, as Robert Peston has noted from London, is that they are sending a message that this is now the forum where the important stuff gets done. The G8 is dead. And I firmly expect Canada to put it out of its misery officially next year when the summit is chaired there.

But there are three more big picture objectives.

The first is to send a message to the world that they are not taking the global recovery for granted. It's true that many countries have surprised the forecasters by coming out of recession much earlier than expected. But senior policy-makers everywhere are anxious to avoid the impression that we're out of the woods.

You might thing that rather strange. Shouldn't they be talking up the recovery, now that the tide of market consumer confidence is finally moving their way? But in fact, confidence is precisely the reason they don't want everyone to relax. Because they think the next year is going to be bumpy - not "double-dip" bumpy, perhaps, but bumpy enough to want to prepare everyone in advance.

This is especially true in the UK, where there is a number of forecasters expecting at least one quarter of negative growth in the first half of next year, even if the economy formally recovers in the next few months. Mervyn King and the chancellor don't want that to come as too much of a surprise - to the markets or anyone else.

The second big thing they want to achieve - at least, the US and Britain do - is a new "framework" for thinking about global growth. This is tricky. As Larry Summers, President Obama's Chief Economic Advisor, , the US consumer "cannot, will not, should not" continue to be the engine of global demand. They're going to adjust. And if other countries don't want to suffer sub-par growth as a result, they're going to have to adjust too. And as of now, that adjustment is barely under way. In the leaked draft of this part of the communique, it warns that "absent further adjustment... there will be insufficient global growth".

I've said enough about this in the past for you to know this isn't a problem that gets solved in a communique. That well-known economist, John Humphrys, grasped the basic problem : there's no easy way to persuade German or Chinese consumers to spend more if they don't want to. There are places you can start - I've written about this before - but they are not the kind of policies that can be imposed from outside.

The Anglo-American backers of the new framework say it will be worth the paper it's printed on - because it will provide, for the first time, a formal mechanism for linking what the IMF says about economic imbalances to what leaders have said about avoiding them. That will provide an element of "naming and shaming" that they didn't have before.

But if the Germans are signing up to it, we can be fairly sure that they don't think it's going to get in the way of the export-driven growth which they quite clearly want to maintain - see my post A tale of two economies and .

Bottom line? The proof of this framework will be in the eating. But the ordinary punter will quite reasonably retain a large dose of scepticism about what the new process can achieve.

Finally: reforming the financial system. Robert Peston has written about this in detail this morning. All I will add is that financial sector reform is an area where the economic, political and financial priorities at this particular juncture are not well-aligned.

From the standpoint of market certainty, and the banks themselves, the system needs clarity on the level and structure of the new rules for capital, leverage and liquidity as soon as possible. But the economic imperative is not to scare the horses. Policy-makers - especially in France and Germany, where banks are still under-capitalised by US and British standards, are determined not to do anything which discourages banks from lending. And the politics - well, the politics speaks for itself. Voters want them to bash the bankers - regardless of whether it makes sense for the financial system or the economy.

We will see progress this afternoon, along the broad outlines Robert has outlined. I will have more later. We will also have a firm insistence - in the words of one senior US official I spoke to recently - that "there will be civilian control of the military". They're not going to make the mistake of letting technocrats make decisions in closed rooms in Basel that end up putting taxpayers on the hook for billions of dollars.

But all that said, the absence of hard numbers will make it hard for many ordinary observers to see what, exactly, has been achieved.

Coulda, woulda shoulda. Ever since the global crisis began, central bankers have loudly protested their innocence, even as others accused them of sleeping on the job. But given a moment to think alone, thumbing through back copies of Central Bankers Weekly, they must surely have been asking themselves whether there was anything else they might have done.

The answer provided by the IMF in a just-released chapter of its twice-yearly World Economic Outlook, is yes, There was more they might have done. But there's no guarantee it would have worked.

The paper, racily entitled , revisits the long-standing debate about whether central bankers should try to prick asset price bubbles before they start.

As I've mentioned before, the conventional wisdom used to be that they shouldn't - because asset price bubbles were hard to spot, and even if you knew you were in one, it wasn't clear you could take the air out of it without deflating the whole economy at the same time. Better a speedy clean-up operation after the event than costly efforts at prevention.

With hindsight, that looks clearly wrong. Surely it was obvious to everyone in the lead-up to this crisis - from your local estate agent to your friendly CDO trader - that there was a bubble? And even if we had only imperfect means to prevent it, surely it's obvious now that central bankers should have had a better try?

Well, the IMF folks look closely at the evidence. They find that there are a number of tell-tale signs that a damaging house or asset price bust is on the way, specifically: above-average growth in credit relative to GDP, above average amounts of investment relative to GDP, and a significant increase in the current account deficit.

So, armed with this evidence, could central bankers have seen this crunch coming? Well, not necessarily. After running their sophisticated models, the authors of the study conclude that even the presence of all three warning signs could only tell you there was a 56% chance of a bad housing market bust in the course of the next three years.

Put it another way - even armed with hindsight and this research, you might still have missed nearly half of the big busts since 1985. Hmm. So much for early warning systems.

Even if you know you have a problem with the stock market or rising house prices, the researchers conclude that traditional monetary policy tools would not have been much good.

Looking back at the period before 2007, they find that monetary policy was, generally, on the weak side, in the sense that real short-term interest rates were pretty low.

But even that isn't universally true - they say real interest rates were actually fairly high in the UK, and that didn't stop soaring house prices. There's little evidence that low policy rates actually drove the boom. Conversely - had monetary policy been tighter, there's no evidence in this study to suggest that higher short-term interest rates alone would have made much difference (or at least, not without tanking the broader economy).

It sounds like a counsel of despair for those who want monetary policy to stop the next asset price bubble - and another get-out-of-jail free-card for the central bankers themselves. But, uniquely, the authors of this study do show how a different approach would have worked - one which takes seriously Mervyn King (and others') call for central banks to have two sets of policy instruments to achieve two distinct goals.

They imagine a situation in which the central bank adjusts the policy interest rate - base rate, in the British case - to maintain stable inflation, but also has a "macro-prudential" policy tool to address asset market variations, which would lower or raise the gap between the policy rate and the rate at which banks lend.

Right now a great deal of brain power is being devoted to the question of what such a macro-prudential instrument would be. I'll say more about it another post. Suffice to say that, in theory, having such a tool would help central banks tackle excess lending booms at source - and not face the unpalatable choice between risky growth and no growth at all.

But there's a catch - this souped-up monetary policy only works, within the model presented in this IMF paper - when the "shock" the policy makers are reacting to involves a loosening of lending standards and build-up of credit. In response to other shocks to the economy, the new souped-up framework for policy could be no good at all. The central bank needs discretion, as well as these new tools, not to mention large dollops of judgement and and good luck.

So, we now know more about when you can intervene to prevent future booms and busts, and how much to blame central bankers for the bust we've just had. But the answer to both is: not as much as you might like. And the how of preventing future crises is going to take a lot more work. Just don't tell the G20.

It's a big week for people who care about both climate change and the global economy. Between the UN General Assembly and the G20 Summit in Pittsburgh, the leaders of the world's most important countries are going to be forced to think about both.

It's true, as Robert Peston notes today, that many environmentalists have been quick to see the upside of the global downturn. Most of the fall in global CO2 emissions expected this year - the largest in at least 40 years - is due to the global recession.

But the more sophisticated greens I spoke to at the start of this year were excited about the crisis for a different reason. If emissions fall as a result of plunging output, then they will go right back up again, if and when the global economy recovers.

No, the reason these greens thought the crisis could be the best thing that ever happened to the environment was fiscal. The argument was that cleaning up the banks and reviving the economy was going to do such damage to governments' public finances, politicians would have no choice but to start taxing carbon.

I always thought this made a lot of sense. We know that governments in many countries are going to be under pressure to cut spending or raise taxes in the next year or two, even though their economies are still weak. You would think it would be politically easier to raise taxes on petrol than on wages in such an environment - especially if unemployment is still going up.

Things may play out that way in Europe, where populations are already more inclined to support green taxes. But remember, even in the UK, the main parties have usually felt obliged to promise that they will compensate for higher green taxes by cutting taxes elsewhere. They weren't supposed to raise any money.

And if that's true in Britain, try making the argument for a big hike in green taxes in the US. Even the Obama administration's very modest suggestions to Congress along those lines have been declared "dead on arrival" on Capitol Hill.

I recently mentioned my theory about the crisis forcing higher green taxes to a very senior US official. "Nice idea," he said. "Shame it's not going to happen."

The chart below, from the OECD, shows just how far the US still has to go in raising revenue from petrol - and, of course, petrol is only a small part of the puzzle. You'll note, too, how tax rates on petrol in other countries have generally gone up since 1998. But not in the US.

There are good reasons why Americans hate petrol taxes, not least the fact that many of them - some of them very poor - simply cannot function without a car. Public transport isn't an option in the more rural parts of the country, and in some of these places it never will be.

But, recession or no recession, it is worth noting that the US aversion to carbon taxes has had an additional, very costly impact, at least from many economists' point of view. Namely, that the entire global effort to combat global warming has had to be designed around a cap-and-trade approach to cutting emissions - not some form of global carbon tax.

The cap-and-trade model has its defenders. In fact, in theory, many would say it's safer to cap emissions, and allow businesses and/or governments to trade permits to emit carbon beneath that overall cap, because with a tax you can never be sure of setting it at the right rate. And you could do a lot of damage to the planet trying to get it right. But in the real world, the signs are that the arguments go very firmly the other way.

For starters - politicians naturally try to game the system. They tend to negotiate very high caps which they know they can meet, to give them wiggle room if policies fail, and useful revenue if they succeed (because they will be able to sell the permits to others).

At the same time, businesses lobby to have the emission permits given away free - rather than auctioned, as economists would prefer. And usually they succeed. They certainly did in the US. But if permits are free, it becomes that much harder for the system to actually cut emissions.

Say this to the negotiators now desperately trying to reach a deal for Copenhagen - and they throw up their hands. "We are where we are", they say. Even if they wanted to, they say, they can't possibly start proposing an entirely new approach this late in the day. They may be right. But we are where we are, in no small part thanks to the US.

Gotcha. That's the one word summary of .

At one level, confirm something we already knew: that the government plans to cut spending in real terms if re-elected. The Institute for Fiscal Studies teased that much out of the chancellor's budget numbers hours after they were published in April. Only the Treasury expects to have to squeeze even more than the IFS thought, by 9.3% rather than 7%.

The prime minister was then criticised in the summer for seeming to deny something implicit in his government's own numbers - when he contrasted Labour's plans to invest in public services with Tory plans to cut spending by 10%.

But the leaked figures show that officials have known since April that Labour's plans imply a similar-sized cut. It was not simply implicit - it was explicit, in the Treasury's own internal tables.

Mr Osborne said the PM had misled Parliament in contrasting Labour plans to invest with Tory plans to cut spending by 10%. I've looked back at the exact quote, and - as ever - Gordon Brown has a get-out. What he actually said, in a Â鶹¹ÙÍøÊ×Ò³Èë¿Ú interview, on 1 July was "I have always told the truth and I've always told people as it is". He was also quoted by the Tories as saying "we don't want to have the 10% cuts the Conservatives are talking about."

I guess he can always say (truthfully) that he doesn't want cuts. Even if he - and all at the Treasury - expect them. Or, of course, he can say that he doesn't want the same 10% cuts the Conservatives are talking about - he wants the 9.3% cut that Labour is (not) talking about.

Then again, if you need this many get-out clauses, perhaps you need to reassess the bit about "telling people as it is"...

So much for the politics. As I mentioned on Today, the most interesting thing about the leaked numbers from an economic standpoint is just how pessimistic the Treasury is being about the rise in social costs over the next few years and, especially, the rise in the cost of servicing government debt. The table in question shows debt interest payment rising from £27 billion this year to nearly £64 billion pounds in 2013-14. The IFS thought it was being fairly conservative in forecasting debt payments would rise to £52bn.

I had also wondered whether the IFS was being a bit gloomy about the growth in social security payments during that period, despite what you would assume to be a fall in unemployment after 2010. But it turns out that the Treasury is at least as gloomy, if not more so. The Treasury numbers show social security costs rising in real terms by 2.1%, as late as 2013-14.

Another part of the leaked memo actually shows the Treasury boasting about how conservative its forecasts are. It points out that almost all of the improvements in the structural deficit between now and 2013-14 is driven by policy. Government decisions in the Budget and pre-Budget report of 2008 will reduce the deficit by £56bn, it says. And even in 2013-14, revenues from the housing and financial sectors are expected to be "only 1% of GDP higher than in 2007/8", despite the announced rise in tax rates.

You might think this sits rather awkwardly against the economic forecasts built into the same Budget. The GDP forecast for 2009 and, especially, after 2010, has been widely criticised as over-optimistic. if they were being so cautious, why not expect growth to be lower as well?

The answer, I suspect, is that the two are related. Officials were put under immense political pressure to raise their growth forecasts. As a consequence - or in anticipation - Treasury officials made sure they were not expecting growth to do much of the work of cleaning up the public finances.

This tallies with what Treasury officials have told me privately, even if the linkage was never quite this explicit. They may have lost the battle on the growth forecasts, but they were going to make darn sure the budget numbers still added up. And in fact, I would say they largely succeeded. A number of independent commentators have suggested that the Treasury might be being too gloomy about the size of the structural hole in the public finances - ie the bit that won't go away, even with economic recovery.

If I were George Osborne, I'd have another reason to be pleased by this memo. As well as allowing an easy goal against the government - it might mean that, if the Tories are elected, being chancellor for the next few years might be slightly less awful than we previously thought.

Has George Osborne been reading Stephanomics? I suspect the answer is no.
But if you read yesterday's post there will have been little to surprise you in on the Conservative Strategy for Recovery.

As predicted, Osborne made a full-fronted assault on the idea that tightening the budget as early as next year would tank the economy. In fact, he said, cleaning up the public finances could actually support growth - for all the reasons I went through yesterday. He even quoted Goldman Sachs in his support.

All that a reduction in borrowing would do, he said, would be to shift demand from government spending to exports, by lowering the pound. And if things go wrong - well, there's always monetary policy to underpin demand.

It's a finely judged decision, and some economists might disagree. But this is a perfectly respectable argument.

Trouble is, you can have all the economic reasoning you like, but even economists understand that theory and practice are rather different things.

Osborne was very clear today on the theoretical argument for cutting borrowing as soon as possible. On the political details - there was no clarity at all.

The only politician who committed content in this area today was , though even he too left out the crucial issue of timing.

In his new pamphlet, Cable says the government's eight-year window for cutting borrowing by 6.5% of GDP is optimistic. He thinks it's going to be closer to 8% of GDP, over a shorter period - say five years.

But at first reading, even he seems a bit vague on when that five-year period should start. And as I explained yesterday - in this debate, timing is everything.

Deciding what to cut is bad enough. But it's possible the when of cuts will be harder still. If the Conservatives win office, they'll be talking about cutting this particular programme, right now - at a time when unemployment will probably still be going up.

You can have all the economists in the world on your side, that doesn't make the politics any easier.

Come to think of it, given the level of public respect for the economics profession these days, their backing could do more harm than good.

Margaret Thatcher had 364 economists come out against her - in a letter to The Times - when she raised taxes in the middle of a recession in 1981. And look how that turned out.

It's not whether any more - it's what, and when. As I reported early in the summer, the chancellor won the first part of the argument with No 10 over public spending cuts and the election. But the debate on the content - and, crucially, timing - of spending restraint is much harder. As we'll be discovering this week, on these crucial questions, none of the major parties has established exactly where it stands.

, he was still unable to utter the word "cut" (though if you listened very carefully, there was a fleeting reference to "reductions"). But neither he nor the rest of the government are running away from the government's own budget plans any more. Those imply significant cuts in real terms in most departments.

But this week, the debate is going to move on - to the itemising of possible cuts. We have already had a contribution from the Taxpayers' Alliance and the Institute of Directors which published

Tomorrow, Vince Cable tells me, he will start itemising the areas that the Liberal Democrats would hit. On that same day, I will also be interviewing Goran Persson, the former prime minister of Sweden. He will be in London to talk about his experience cutting a 10% of GDP budget deficit, in the wake of a massive financial crisis in Sweden in the mid-90s.

You'll hear more about that tomorrow. Suffice to say that we've heard a fair bit about Canada's experience cutting its government down to shape in the 1990s - but Canada is a highly federal country, which achieved a good part of its federal spending "restraint" by simply shifting costs down to the states. Many Conservatives think Sweden is a more useful example for Britain today. Even though it was a Social Democrat wielding the axe, it was Sweden's over-arching welfare state which received most of the cuts.

So yes, this week is all about the what of spending cuts. And you can bet that the debate over how much, exactly, to itemise in their manifesto will rage within both parties for some months to some. Even the mighty chancellor doesn't have a precise answer to that one just yet.

But trust me, the question of timing is, if anything, even harder - and most economists would say, even more important.

A brief recap: between Budget 2008 and 2009, the Treasury discovered an extra £90bn in "structural" borrowing by 2010 that won't go away with the economic recovery. Think of that as the hole that needs to be filled. The chancellor's budget plans show Britain filling that hole by 2017-18. And he has said that half of the squeeze planned for 2010-2014 will be through real terms cuts in public spending. So, if nothing else changes - and Labour win the election - No 11 would be looking for many of the same sorts of cuts as those listed in the Reform report. (They might look at "cutting middle-class welfare" for example - which is page 57 of the Reform report. Abolishing child benefit and the Child Trust Fund would save just under £8.5bn a year.)

If you look at it that way, the crucial difference between Labour and Conservatives is not so much the scale of spending cuts - but the timing. On current plans, Labour will squeeze the budget by £90 billion a year over eight years. The Conservatives think it should happen faster - starting next year. Of course, if they cut sooner, the cumulative reduction in spending could end up being larger than £90bn a year, but I'm trying to keep this simple.

Can you slash the budget next year without tanking the economy? Labour like to say you can't. They want to make the debate between them and the Conservatives one of "reckless" spending cuts versus Labour's "wise" restraint.

That will be central to Gordon Brown's approach to both the G20 Leaders' Summit in Pittsburgh next week and the Labour party conference a few days later. He will say that the global economy can't afford to be taken off life support just yet. And nor can the UK.

But there are two problems with this line of argument. First, unlike all the major G20 countries, the UK is already planning to tighten fiscal policy by 2% of GDP in 2010. (Within the G20, only Argentina plans to tighten in 2010 as well.) If it's a risky thing to do, then it's a risk that Labour is already planning to take.

Second, the slogan about reckless cuts and the economy misses out two large chunks of the economic equation - namely monetary policy and the exchange rate.

As I discussed at some length earlier in the summer, there lots of different policies supporting the economy right now, and when it comes to "exit strategies" it matters a great deal which comes first. If the government - any government - announced tighter budget plans starting in 2010, it is possible that the bond markets would reward that government by pushing down long-term interest rates (also known as the interest rate on government debt). That could stimulate the economy in its own right by making it cheaper for companies to borrow. It could also, by reducing the return on sterling investments, push down the pound, giving an extra fillip to exporters. That would, non-coincidentally, also help with the long-term need to re-balance the economy in favour of investment and exports.

This is the line the Conservatives are planning to push over the next few weeks. And it's not mad. In fact, senior economists at Goldman Sachs have just published a more sophisticated version of the same argument.

It's tempting to say that tighter fiscal policy would also help defer the day when interest rates have to be raised. Indeed, that is what many economists mean when they talk about sequencing in this context. The argument would be that tighter fiscal policy would help allay fears of inflation, and thus allow the bank to keep interest rates lower for longer.

But, as the Goldman Sachs economists admit, you can't have it both ways. Either the tighter budget will cut overall demand, or it won't. If the net effect is expansionary - thanks to the fall in long-term borrowing rates - then the Bank could have just as much - or even more - reason to tighten than it did before the budget squeeze was announced.

That is what happened coming out of recession in the early 90s: real government spending didn't grow for four years. But a weak exchange rate helped support exports and the overall economy. Growth averaged 3.5% a year and interest rates rose as a result.

The basic point still stands: tighter fiscal policy won't necessarily tank the economy.

But here's the thing to remember. No-one knows for sure. That chain of cause and effect I outlined - between tighter spending and lower long-term borrowing rates and a lower exchange rate - involves a lot of loose links. We would usually expect bond yields to fall with such a change of policy, but this is a time when the Bank of England will be getting out of the business of buying tens of billions of pounds worth of government debt. The bond market will not necessarily be acting as we would usually expect.

The effect on the pound is even more unknowable, at least in the short term. It could fall, due to the fall in long-term rates. But it could also rise, in the expectation that growth will be higher than previously thought. Remember that all the textbooks would predict that quantitative easing would lower the exchange rate. Yet sterling rose significantly in the months after it was announced, probably on the grounds that it would help the economy.

Phew. Like so much that's happened in the past year, this isn't an easy topic to have at the centre of a general election. But it's a hugely necessary one. Especially because there is one thing all sides - even the economists - can agree on. If the economy doesn't recover properly, then it doesn't matter whether the plans for the budget are loose or tight. They won't be achieved.

The recovery might be hurt by a tighter budget squeeze - as Labour suggests. Or it might be helped, as the Conservatives intend to claim. But it matters which turns out to be right. Because you can't cut borrowing or spending as a share of the economy if that economy refuses to grow.

Update, 15 September: An earlier version of this post linked to and mentioned the think-tank Reform instead of the Taxpayers' Alliance - now corrected and many apologies.

I write this from New York, where commentators can talk of little else but President Obama's "make-or-break" speech on healthcare.

For the past month, the US airwaves have been filled with pictures of townhall meetings and demonstrations on health care reform across the country, with angry citizens begging the president not to embrace "socialised medicine", and turn America into Russia. As if.

The good news for the White House is that all that sturm und drang seems to have changed very little. are pretty much what they were before the summer.

A CBS poll taken at the end of August found that 60% of Americans still support the idea of a government-backed alternative to private health insurance, compared with 66% in July. And 50% said they preferred Obama's ideas on health care to the Republicans' - down from 55%.

So much for the good news. The bad news is that the financial markets aren't the only part of the economy that can be led astray by human psychology. It can mess up the best laid plans for healthcare reform as well.

One of the big findings of behavioural economists is that people suffer from "status quo bias". They fear change and hold on to what have, even if what they have is pretty flawed.

We saw a taste of it in the UK this summer. No-one has a good word to say about the NHS - until it is threatened from outside, and we all suddenly decide it's the best health system in the world.
, status quo bias is killing Obama's healthcare reform plans.

In the middle of the presidential campaign a year ago, a poll found that only 29% of likely voters rated the US health-care system good or excellent. But asked the same question last month 48% put it in the good or excellent category.

The only thing that's changed about US healthcare in that time is that voters have listened to months of debate over reform.

Should anyone outside the US really care about what happens? Here are two obvious reasons why we should - and one slightly less so.

The first is that healthcare reform is the most important policy goal of the president of the world's most important country. Win or lose, this battle is going to affect his ability to get other things done as well, some of them (like climate change) extremely important to the rest of the world.

Second, the US healthcare industry is roughly the size of the UK economy. It matters if an industry that size is going to be fundamentally reformed. And, given the rate of growth in healthcare spending right now - it may matter even more if it isn't reformed.

The third, less obvious, reason to care about the US healthcare system is that it has actually played an astonishing role in making the US the world's largest consumer in the past 20-30 years.

Between 1950 and 1980, personal consumption in the US was around 62% of GDP. But in the next 30 years it grew to nearly 70%, about 8 percentage points more than the OECD average.

We tend to think that rise was all due to a debt-fuelled spending spree on foreign-made cars and TV sets.

But the share of spending devoted to those kinds of physical goods actually fell sharply during that period, from 45% in 1980 to about 33%.

That was partly thanks to those things getting cheaper. But the main reason was the onward march of healthcare costs.

According to the US Bureau of Economic Analysis, healthcare costs now account for 16% of total private consumption, roughly double the share in 1975. And of course, government healthcare spending has risen hugely since the 1970s as well.

The bottom line is that America's very high level of consumption relative to other countries is a relatively new story, and it is almost entirely accounted for by rising healthcare costs.

Unlike other consumption, health care spending has even continued to rise since the US went into recession at the end of 2007.

Of course, health care costs have been rising elsewhere - in some cases even faster than in the US. But per capita health spending is still double the OECD average, and US healthcare spending is more than 17% of GDP - streets ahead of anyone else.

Critics say - with some justification - that Obama's plan will do very little to curb the growth in health care spending in the US. It may even make things worse.

You might also say it's up to Americans to decide what they spend their money on. We already know that the rest of the world cannot afford to rely on US consumers in future as heavily as they have in the past.

All of that's true. But if we want American consumers to have the money to buy much of anything at all, we probably want somebody - either President Obama or someone else - to change the status quo in American health.

It was never going to match up to the drama of 6 months ago, when the lead item on the G20's agenda was saving the global economy. But at their meeting on Saturday the finance ministers did what they needed to.

They moved a few more steps to building a safer financial system - and sent a signal that the most important countries in the world weren't going to call time on the crisis quite yet.

All while resolving the traditional pre-summit row involving the French. Though France is declaring victory, voters hoping for caps on bankers' bonuses will be disappointed. But as a result of all the changes agreed by the G20, the average banker might earn a little less.

Banks will certainly have to put aside more capital in the good years to insure against the bad - though ministers still have to decide exactly how much. Not as exciting as some of the meetings of the past year, perhaps. But where the global economy's concerned, some ministers here would say boring made for a pleasant change.

There's an important issue with bank bonuses which the G20 leaders need to confront - and then there's the issue which plays best to the voters. Guess which one is being played up by politicians in France, Germany and - heaven forfend - the UK?

The issue that goes down well in most of the world's living rooms is "how do we cap bankers' bonuses so they can stop making so much loot?"

Most voters - understandably enough - think that bankers have been earning far too much money for far too long. And they want it stopped.

, that's the basic instinct he's appealing to. It gives the welcome impression that he wants to put a ceiling on how much any individual banker earns, so there is finally a limit other than the sky.

But even the French president doesn't actually mean it that way. Because even he doesn't think it's feasible to cap what individual traders can earn.

You can imagine the negotiations now: "you can't have a penny more than £5m." Any plausible number from the banking standpoint would inevitably still sound huge to the man - or woman - on the street.

If shareholders want to pay certain employees an enormous amount of money, they will find a way to do it. If it can't be in the form of something called a "bonus" then it will be in the form of a "basic salary" which gets re-negotiated every year on the basis of performance, or something else that does the same job.

In their joint letter today, the French, German and British leaders have agreed to "explore ways to limit total variable remuneration in a bank either to a certain proportion of total compensation or the bank's revenues and/or profits."

That is rather different, though it does go beyond what the FSA has discussed, and it may not be given a lot of time by the US.

If you limit the amount of a bank's profit that can be distributed to employees, you are at least addressing the key issue, which is whether those employees - as a group - are taking cash out of the institution which ought to be saved for a rainy day.

For regulators - and all of those who've been paying the price for the banks' mistakes - the problem with city bonuses in the past was not simply that they were too large, it was that they were too large, when compared to the amount of capital the banks were putting aside to insure against future crises. That is what is going to have to change in the future.

There are plenty more short-term challenges facing G20 leaders - not least, sustaining the recovery, and making sure it doesn't get killed by every government withdrawing their stimulus all at once.

But the surprising return to profit of some of the world's biggest banks - particularly in the US - has rather caught policy makers on the hop. They thought they had a while to think about how, exactly, banks should be forced to put aside their profits in the good years to prepare for the bad ones. They thought we were still in the bad year era. But for some, it's quite possible there's a good year starting right now.

When politicians talk about capping bonuses they sound like they're playing to the gallery. And they are. But for once there is also a kernel of good sense in the populism.
If we're going to build a safer financial system, banks earning good profits need to be putting more of that cash aside, as a safety buffer. Regulators can't make them do that if bonus season means the money's already gone out the door.

It might be a blip - but it feels like the end of an era. For years we borrowed and borrowed, and we didn't think too hard about tomorrow.

But not any more. than they took out, for the first time in at least 16 years.

After so long carping about all of us living beyond our means, you might think that economists would consider this good news. Not a bit of it.

You see, in economics - as in life - timing is everything. If all of us - government included - had borrowed less in the boom years, we'd now be very grateful for our restraint.

But there's borrowing less in a boom, and there's borrowing nothing at all in the middle of a bust. That's not welcome news at all - even if it may show we're moving to a different time.

To put things in perspective: British consumer debt now stands at just over £1.4 trillion - or just under £24,000 for everyone in the UK - nearly all of it in the form of mortgages.

We found out yesterday that number went down by £635m - a mere £10 per head. Which isn't much at all. But it is the first time it's happened since at least 1993 - when, I might add, personal debt was £1tn lower than it is today.

British companies spent July paying off their debt as well - the stock of mainstream corporate debt fell by a more impressive sounding £8.4bn - the biggest such decline since 1997.

That is bad news for the Bank of England - which wants companies, especially, to be helped by their policy of pumping billions into the economy.

The Bank prefers to look at the quarterly data than the more erratic changes month to month. But at the very least, these numbers suggest it has more to do.

And - where households are concerned - they show quite how drastically the mood of borrowers and lenders has changed in barely a year.

Even if we were a nation of worthy savers, you would expect net lending to individuals to keep going up - at least for mortgages.

As Kevin Daly at Goldman Sachs reminded me, the average house in Britain only changes hands every 8 years, meaning the people selling the house, on average, should have a smaller mortgage than the people buying it.

So - even if house prices have been falling for a year - you'd expect the buyer's new mortgage to be larger than the old mortgage being repaid.

Net lending would carry on rising, even if house prices were falling, and even if households were saving more.

After all, the figures don't tell you anything about the big wedge of cash for the people at the end of the chain, who even now, are probably selling their house for more than they paid for it, and aren't taking on any new debt.

In fact net mortgage lending did rise throughout the last recession in the early 90s, amid falling house prices and a sharp rise in saving.

So the fact that lending has actually fallen tell us these are truly exceptional times. The Bank of England won't want to see this happen month after month.

But if we're going to have more balanced growth in the future than we had in the past, you might well want borrowing to grow more slowly than the economy as whole - so the stock of debt relative to GDP starts to fall.

And you would certainly want households to start saving more. Last year households saved less than 2% of their income. In 1995 the figure was 10%.

You never know, that might make us a rather different nation than we are today.

If interest rates go up, we journalists might worry a bit less about the rising cost of a mortgage - and talk more about the return on savings going up.

(For what it's worth I think we're already giving savers more attention than they had before. And rightly so.) In that saver nirvana of the future, first prize in the church raffle might be a new ISA.

Who knows, if Britain stopped being a nation of big borrowers, foreign investors might even stop worrying that we would decide to inflate all our debts away.

Yes, there'd be everything to play for in savers' Britain. But Lord, please don't send us there quite yet.