For the last several budgets/autumn statements I have agreed to write an immediate response for some media outlet, and have therefore felt obliged to watch either the speech itself, or the media reports on the day. The good news is that no one has asked this year, and so I can ignore all budget coverage until tomorrow. This will leave me better off, because in macroeconomic terms most budget day coverage has over the last seven years been largely nonsense.
I can confidently forecast that today you will hear a great deal, at great length, about how the path of government borrowing has changed since the Autumn Statement. Journalists will ask endlessly whether he has done enough to reduce borrowing, or whether he had enough money to spend more. At the moment this is all utterly meaningless. In fact it is worse than that. It encourages people to think that government budgeting is just like household budgeting. It is, to be blunt, what gave us the disaster that was austerity.
What any macroeconomist should ask of this budget is has the Chancellor done enough to get UK interest rates off the zero lower bound: to get us out of what economists call a liquidity trap. When interest rates have gone as low as the Bank of England feels able to take them, then it has lost control of the economy. That is the situation right now. The only duty of the Chancellor in that situation is to give the Bank back control through a fiscal stimulus. [1] If he does do that the short term deficit and borrowing numbers that go with that stimulus are completely irrelevant. If he does not do that his budget has failed.
That is basic macroeconomics. But you will not hear any macroeconomics from the Chancellor, or most of the mainstream media. The idea that the Bank does macroeconomic stabilisation and the Chancellor does bookkeeping has become embedded in mediamacro, and even seven years in a liquidity trap has not been able to change this. Alas even the IFS, which is so brilliant at everything else, does not do macro and so reinforces the household budgeting metaphor.
Mediamacro will also spend hours talking about the OBR forecasts for this year and next. This too is pointless. I am sure the OBR will do what it normally does, which is put together a short term forecast that is not far from the average of other forecasters. To their great credit, they also forecast GDP per capita. It will be interesting to see who in the media picks that up. No doubt Brexiteers will go on about how great the economy has been in 2016 despite all the gloomy forecasts. There is a simple antidote to this, which any journalist can apply. Note that a great deal of the growth in GDP in 2016 was due to immigration, the same immigration that the Prime Minister has said was the cause of the Leave vote. [2]
What the better journalists focus on from the OBR is its forecast of where trend output is and how fast this trend will grow in the future. That is the only thing that will influence how much the Chancellor thinks he can borrow in future years. It is the only forecast that matters for future budgets, and as I have already noted it should have no influence on the current budget. Note particularly how the OBR has had to adjust its forecasts for future growth and tax receipts as a result of Brexit. (On this, see some good analysis by IPPR’s Catherine Colebrook.)
Of course the individual measures the Chancellor announces (either in his speech or elsewhere) are important. But even here a day’s reflection is useful, to deconstruct the spin and put the measures in context. (Once again, the OBR’s document can be very useful in that respect.) For pretty well anything the Chancellor does on the spending side, one important context is the extent to which he is just reversing the cuts his predecessor ordered. This is why the IFS wisely waits a day before presenting its post-budget analysis.
What I hate most about budget days nowadays is the constant repetition by government politicians, echoed by mediamacro, about not being able to afford improvements to public services. The reality, the detail of which Polly Toynbee sets out clearly, is that this government has managed to cut plenty of taxes which seem to have been affordable. But there is a deeper concern.
As I showed in this post, the performance of the economy since 2010 has been terrible. There has been no recovery, using the proper meaning of the word, from the Great Recession. All this time the Bank has been forced to keep interest rates at or near their floor, and use incredibly inefficient instruments like QE, because the government has kept on cutting spending. It is not normal to cut spending in what should be a recovery phase of the business cycle: at least not normal since the mistakes of the 1920s and 1930s.
In the years immediately following 2010 the government could claim its austerity policies were the international consensus, but no longer. In the Eurozone outside Greece austerity has come to an end and their recovery is gathering pace. In the US the central bank, for better or worse, is raising rates. Only in the UK does austerity continue and the economy continues to stagnate. Which is why I’m glad I do not have to watch lots of people completely ignoring all these points today.
[1] I’m not talking measures that might allow the Bank to raise interest rates by a quarter of 1%. I’m suggesting a stimulus such that members of the MPC say unequivocally rates will need to rise, and the only debate is by how much. Anything less than this just allows the economy to get blown back into a liquidity trap when something mildly bad happens.
[2] As background, GDP per capita increased by just over 1% in 2016, which does not sound so good. Average growth from 2010 to 2016 has been 1.2%, compared to 1997-2010 when the average was 1.4%, a period which included a global financial crisis and the worse recession since WWII. Having to get the deficit down is no excuse for this terrible performance, because fiscal consolidation need not reduce GDP if it is done outside a liquidity trap. This is the basic bit of macroeconomics that both this government and mediamacro fail to recognise.
Two comments to consider:
From Paul Hunt:
The government will keep on cutting public services because (a) it is determined to shrink the size of the state - and this chimes with the (unfortunately underinformed) views of many voters, (b) those who will suffer most from these cuts either don't vote or would never vote Tory and (c) either the cuts won't impact very much on the hordes of well-heeled extracters of economic rents that vote Tory or if they impact on instinctively tribal Tory voters these voters will always find someone else to blame.
Effective political and economic power is in the hands of the hordes of rent extracters. The ability of the majority of ordinary citizens to apply effective collective action in pursuit of the common good as voters, as workers or as consumers has been destroyed by a succession of governments of all persuasions since 1979.
The Labour party, which should be the vehicle giving substance to effective collective action, is divided between inept managerialists who have been emasculated or suborned by the corporate capitalists, high net worth individuals and the armies of professional rent-seeking flunkies and functionaries they retain (including pliant media hacks and tame academics) and unreconstructed socialists (supported by youthful naive idealists) who retain a profound ignorance and hatred of market mechanisms and a charming, but totally flawed, faith in the omniscience and omnipotence of the state.
Effective political and economic power is in the hands of the hordes of rent extracters. The ability of the majority of ordinary citizens to apply effective collective action in pursuit of the common good as voters, as workers or as consumers has been destroyed by a succession of governments of all persuasions since 1979.
The Labour party, which should be the vehicle giving substance to effective collective action, is divided between inept managerialists who have been emasculated or suborned by the corporate capitalists, high net worth individuals and the armies of professional rent-seeking flunkies and functionaries they retain (including pliant media hacks and tame academics) and unreconstructed socialists (supported by youthful naive idealists) who retain a profound ignorance and hatred of market mechanisms and a charming, but totally flawed, faith in the omniscience and omnipotence of the state.
Comment two from 'Anonymous'
Your argument is significantly more Keynesian than many other commentators.
The problem with it is, how much public borrowing would be required to significantly raise interest rates? And, given that government debt levels are substantially above where they were in 2007, what is that going to cost the government in terms of increased interest payments and higher yielding new bonds?
And, perhaps most importantly, government revenues as a percentage of GDP have stayed relatively flat (despite tax cuts, the tax burden has simply shifted to hidden taxes e.g. insurance) while government spending is still well above where it was even under Brown as a percentage of GDP. Cost disease in government is a serious and monumental problem - the cost of government services is rising despite perceived 'cuts'. That makes us all - and the electorate - poorer in perceived terms in terms of worse quality services that cost more.
So, essentially, you could funnel money into government investment in infrastructure and such but its affects on actual interest rates would be questionable, limited (with a massive potential for waste) and it would severely limit the ability of government to respond to an actual crisis - in other words the same potential problem central banks face at or near the ZLB. Governments cannot borrow forever without unearthing bond markets and worsening public finances in the future.
The reason for the decline of interest rates is not just a lack of fiscal stimulus. It is high debt levels in the whole economy, a low velocity of money, weak global trade growth, weak global GDP growth, weak productivity growth, weak private investment, more money being 'saved' overseas by corporations, higher global inequality and even, possibly, a global shift away from manufactured goods towards services. Do you seriously think one piddly country off the coast of Europe could completely overturn the global trend and restore 5% or so interest rates seen before 2008?
The problem with it is, how much public borrowing would be required to significantly raise interest rates? And, given that government debt levels are substantially above where they were in 2007, what is that going to cost the government in terms of increased interest payments and higher yielding new bonds?
And, perhaps most importantly, government revenues as a percentage of GDP have stayed relatively flat (despite tax cuts, the tax burden has simply shifted to hidden taxes e.g. insurance) while government spending is still well above where it was even under Brown as a percentage of GDP. Cost disease in government is a serious and monumental problem - the cost of government services is rising despite perceived 'cuts'. That makes us all - and the electorate - poorer in perceived terms in terms of worse quality services that cost more.
So, essentially, you could funnel money into government investment in infrastructure and such but its affects on actual interest rates would be questionable, limited (with a massive potential for waste) and it would severely limit the ability of government to respond to an actual crisis - in other words the same potential problem central banks face at or near the ZLB. Governments cannot borrow forever without unearthing bond markets and worsening public finances in the future.
The reason for the decline of interest rates is not just a lack of fiscal stimulus. It is high debt levels in the whole economy, a low velocity of money, weak global trade growth, weak global GDP growth, weak productivity growth, weak private investment, more money being 'saved' overseas by corporations, higher global inequality and even, possibly, a global shift away from manufactured goods towards services. Do you seriously think one piddly country off the coast of Europe could completely overturn the global trend and restore 5% or so interest rates seen before 2008?
