Peter Bickley: We've had plenty of what we fancy - now time for the medicine

A BIT of what you fancy does you good - goodness knows how many tons of chocolate, cream and assorted banned substances get consumed every year thanks to that self-justifying line. Yet it is probably true: something that helps you feel cheerful may well be making a wider contribution to your well-being.

Paradoxically, a bit of what you do not fancy can also do you good. Last month I reported on my epic ascent of Arthur's Seat. Had that been in the pouring rain it would have been pretty miserable, but the sense of achievement after would have been all the greater. A bit of what you don't fancy tends to be most appropriate when it is least wanted and has a habit of disguising its benefits.

What is true for us as individuals is true for us as a group. We collectively are the UK economy. We all recognise that we spent too long on a binge. I regularly lambasted the Labour government for its fiscal incontinence, but the rot spread far wider. Excessive leveraging and incomprehensible risks in the banking system; easy availability of credit from lenders without any pretence at prudence; unsustainable credit card balances and a general ethos of "grab it now" set us up for a fall. And fall we did.

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The fire-fighting was pretty impressive stuff. Bank bail-outs, fiscal stimulus, quantitative easing - in the extremity of those times this was not so much a bit of what we fancied, it was a shedload. And it was good: policy-making during the immediate crisis was far from error-free but it was brave, ambitious and remarkably successful. But things (and people) have moved on and are very different now.

Taxes are rising and real incomes are being squeezed, with the government determined to reduce the deficit. "Lower public spending" is something best believed only when actually seen but this time it's for real. Quantitative easing has run its course, although monetary policy remains extremely loose. Inconveniently, externally induced inflation is acting like an additional tax on us all, raising further hurdles in the way of recovery. It is fair, then, to wonder whether the policy mix is right.

Fiscal austerity offset by monetary ease is a tried and tested formula. But today's economy is unusually stressed and there are members of the Bank of England's Monetary Policy Committee arguing cogently for policy to be tightened (albeit by only token amounts). And with only our small (but perfectly formed) manufacturing export sector really humming right now, it is on the face of it hard to defend such aggressive fiscal retrenchment.

Time to wheel in that essential objective reassurance, the yield on British government debt (gilts). At just 3.2 per cent the ten-year benchmark gilt yield is just about as low as ever in our lifetimes.

Moreover, while peripheral euro bond markets have been falling apart and even some non-peripheral ones have seen yields rising, ours have been falling. The markets, then, are happy with what they see.This matters on two levels. On the inflation front, those yields tell us that the markets accept the Bank is getting its forecasts right and inflation will fall, and though interest rates may tweak upwards later this year, it won't be aggressive.

On the fiscal front, markets laud the policy and, by implication, do not believe that it will stifle recovery. Many, including me, have at times questioned whether this trick could be made to work and many would not give a fig for what the markets think.

But they should - markets are our paymasters. Low yields are a sign of approval and are also part of the solution, making it cheaper to roll over our debt. The UK's fiscal austerity feels like quite a dangerous experiment but the message from the bond markets is clear: they think it will work.

• Peter Bickley is a consultant economist

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