Duncan’s Economic Blog

Fiscal Policy: Time to heed the word of God

Posted in Uncategorized by duncanseconomicblog on April 28, 2011

I described yesterday’s GDP figures as on the border between ‘terrible’ and ‘merely bad’. I also pointed out how the number matches up with recent OBR forecasts.

Tony Dolphin put is very clearly, ‘the UK has just come as close as it is possible to come to a recession without actually being in one.’ He further stated that the real worry was the ‘possibility that the UK will experience several years of low growth, as Japan did in the 1990s.’ The dreaded L shape I also referred to yesterday.

The FT’s Lex column is clearer still, By any absolute standard they [the GDP figures] were awful’.

On Newsnight last night (iplayer) the panel of business-people discussing the numbers were unanimous in their gloom. Not just former Labour minister Lord Myners but fund manager Nicola Horlick and former ASDA CEO Andy Bond, who last year signed a letter backing Osborne’s approach. In a separate interview PWC’s Chief Economist John Hawksworth warned that a double dip recession was possible.

In other words it’s not just the usual suspects who are worried about the state of the economy. My own double-dip forecast is looking less radical.

It’s time for Osborne to take stock of the economy and think again. It’s time for Plan B and it’s time, as I say in the title, to heed the word of GOD.

Or Sir Gus O’Donnell, the Cabinet Secretary, as he is otherwise known.

Back in December Philip Stephens wrote in the FT that he had written a memo emphasising the uncertainty in the OBR’s forecasts and calling for “if not a plan B” than at least a series of “possible stimulus measures”.

As I blogged at the time government sources were quick to point out that ‘Treasury Ministers’ had not requested such a memo. Which of course was in no way a denial of the story, ‘Plan B’ came from the Cabinet Secretary and the Cabinet Office and was ignored by the Treasury.

This is the context one has to consider when reading a very important Jonathan Portes article in the FT. As today’s Guardian leader rightly says:

Yesterday, Jonathan Portes, former chief economist at the Cabinet Office, reiterated his call for “scaling back” the “fiscal overkill”. Mr Portes worked in a senior policymaking capacity with coalition ministers until recently; his intervention deserves to be taken very seriously.

Portes was, until very recently, the Chief Economist of the Cabinet Office and is now at NIESR. His CV states that hehe advised the Cabinet Secretary, Gus O’Donnell, and Number 10 Downing Street on economic and financial issues.’  

So I think his article is the best guide we can have to what the Cabinet Office Plan B looks like, in contrast to the well known Treasury Plan A, without having to wait 15 years for a series of candid interviews in a Michael Cockerell documentary.

It is a very significant intervention indeed. It describes the current policy out look as ‘misguided’ and ‘futile’ and concludes by saying:

Put simply, the UK is a large country, issuing debt denominated in its own currency. It has very long average debt maturities, and therefore no serious issues over its long-term solvency. Countries such as ours have considerable freedom over fiscal policy in the short to medium term. We should use it.

I couldn’t agree more.

10 Responses

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  1. Rob said, on April 28, 2011 at 9:25 am

    If this doesn’t happen, what are the alternatives? Can monetary policy make a difference by creating the expectation of future growth? Osborne’s approach thus far has been to use government spending to influence the amount of government that we have, irrespective of the role fiscal policy plays in determining economic growth. He seemed happy enough to leave the growth question to the BoE, but they have been spooked out of further QE by recent inflation figures. Now that inflation might be coming down, is there a possibility that the Bank could intervene to restore growth? If so, would it work and how would it rate compared to fiscal stimulus?

    Apologies for the barrage of questions, but I’m genuinely curious to understand how this works, both politically and economically.

    • duncanseconomicblog said, on April 28, 2011 at 9:36 am

      No probs for the questions Rob. On QE I wrote a long-ish post last year that might interest, which mainly went back through my own thinking:

      https://duncanseconomicblog.wordpress.com/2010/09/30/quantitative-easing-ii-why-im-worried/

      Another recent post on monetary policy that may interest:

      https://duncanseconomicblog.wordpress.com/2011/04/11/operation-twist-or-what-the-bank-should-do-about-inflation/

      • Rob said, on April 28, 2011 at 10:03 am

        Cheers for those. So, it would seem that Osborne really does want to leave the Bank to deal with economic growth via monetary policy. I can see why he does – it turns fiscal policy into a question of “how much government do we want”, leaving him free to cut the size of government without having to worry about economic growth. I imagine that Osborne’s end-game is some kind of balanced budget rule (enforced by a beefed-up OBR 2.0?) which would prevent (or strongly dis-incentivise) future governments increasing spending via borrowing. After all, if we never need fiscal stimulus then arguments for higher government spending become a lot harder to win. Perhaps that’s the point he’s trying to prove?

        • Dave Holden said, on April 28, 2011 at 12:20 pm

          “I imagine that Osborne’s end-game is some kind of balanced budget rule (enforced by a beefed-up OBR 2.0?) which would prevent (or strongly dis-incentivise) future governments increasing spending via borrowing.”

          Wasn’t this actually Labour policy – something called The Fiscal Responsibility Bill.

  2. yorksranter said, on April 28, 2011 at 4:34 pm

    Touched by the hand of GOD, surely?

  3. Adam Lent said, on April 28, 2011 at 9:18 pm

    I wasn’t quite as impressed by the article as you. I’m not sure it says anything that hasn’t been debated very widely already. And I don’t think Portes being on the progressive part of the deficit reduction spectrum is entirely surprising.

    It is an interesting issue though why equally knowledgable and intelligent economists take such distinct views on the fragility and/or power of the bond markets. Mervyn King, for example, clearly does not share Portes’s view. Could it be that the bond market reaction is in fact very difficult to judge and many simply ascribe reactions that uphold our hawkish or doveish inclinations.

    There may also be a risk of self-contradiction by progressives here. We are very quick to assert the power of animal spirits and irrational herd behaviour when talking about the markets in 2008 but suddenly assert solid common sense when talking about the bond markets in 2010/11.

    • duncanseconomicblog said, on April 28, 2011 at 9:25 pm

      I’m more interested by what he used to do and what it maybe reveals about thinking inside government.

      Ofcourse bond markets versus stimulus is the trade off, but good to acknowledge it’s a trade off.

      Portes spent most of his career involved in government debt management.

  4. Mike said, on April 29, 2011 at 7:39 pm

    The OBR’s target is the deficit, not growth, and deficit reduction is currently on course (or even ahead). Should the deficit increase or fail to reduce, there may be a Plan B, but not until. Growth may be required to reduce the deficit later, but the cutting is working for now.

  5. BenM said, on April 30, 2011 at 8:15 pm

    But Mike you cannot cut the deficit without growth. Much of the undershoot in borrowing was thanks to Labours legacy of growth which Osborne has now squandered.

    That’s the reason the OBR has had to up-rate deficit forecasts for the end of this parliament in 2015. All because growth has disappeared in the last 6 months.

  6. Keith said, on May 1, 2011 at 2:42 am

    There’s no point asking for rationality from these people. it took ten years for Lawson to ditch monetarism without really admitting he had. Then he screwed up demand and produced inflation…


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