I have had a chance to review the Office for Budget Responsibility's Fiscal Risk Report for the UK for the last 30 minutes or so. It's over 300 pages long. Of course what follows is not a complete review, but searching some key words always helps find key facts.
The headline is that it says we are in a bad way:
Over the longer term, we see some relatively high probability, high impact risks to fiscal sustainability.
That's the one thing the report seems sure about.
And now let me say why this is nonsense. First, it assumes we must balance the books by 2025. This is its key assumption.
The second key assumption is that whatever happens in the future the government will do no more QE, even though the report admits that one third of all government debt is now owned by the government and that the debt in question has, effectively, been cancelled.
And, third, it assumes that in that case the government is beholden to inflation and debt management risks over which it seems to think it has little control, even though the report acknowledges that QE has managed this risk rather well.
So, to come to some basic first conclusions they are that this report is based on an objective of a balanced budget that is neither desirable and attainable, goes on to ignore the most powerful economic weapon used by the government in the last decade and all of its consequences and then suggests that prudence is required even though this is only because the OBR is assuming that we are living in a household economy, subject to the whim of markets, when that is simply not true.
That could be dismissed as absurd except for the fact that such a report, based on such unsound logic, will impinge massively on the well-being of people in this country. It would seem that the reckless economic irresponsibility of the Office for Budget Responsibility knows no limits, and we'll all pay the price for that.
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The creation of the OBR was merely an anti-statist Tory party signalling to the voter that Government cannot be sensible with budgets so therefore cannot be trusted.
If it were up to me I would abolish it. Everyday it is allowed to continue to exist only strengthens the lies it tells.
Not read the report but dont understand why no more QE is a key assumption.
As I understand it the only way the existing QE programme impacts upon OBR figures is through the receipt of interest from the gilts on the BoE balance sheet.The forecasts must assume further receipts of gilt interest or the resale of the gilts on the market.
As you say the adoption of the austerity logic as the only logic is nonsensical and closes down all alternatives.
QE removes the debt constraint altogether
If the markets don’t like what the government is doing it just buys its won debt
And there is no reason to pay interest on the resulting reserves
I understand that QE has the potential to nullify the debt constraint however I thought that the OBR portrayed the debt to GDP percentage unadjusted for QE consolidation.
If the debt to GDP percentage is restated then QE going forward becomes as important as public borrowing estimates.
But there is cancellation so the OBR has that wrong
And yes, QE assumptions are vital in that case and none is assumed, to which the question is why?
One third of government debt is effectively cancelled due to QE. That is true, but as of June 2017 the UK private banking sector holds reserves of £440bn due to QE (because most of QE effectively lands up as reserves rather than being spent into the economy). Currently the BoE pays £1.09 billion in interest on this, a negligible sum. But that is because the base rate is currently 0.25%. If the base rate were to return to something like ‘normal’, say 5%, then the BoE would have to pay £21.9 billion per annum, not at all negligible. Hence you can only advocate perpetual QE if you think that ‘normal’ will never return.
There is no obligation on the BoE to pay anything on these reserves
There need be no cost at all
So, why do both the Fed and the BoE currently pay interest on reserves?
Because they’re bankers keeping bankers happy
But I am assured there is no necessity for them to do so
I was under the impression (from MMT) that paying interest on reserves just sets the interest rate, or could be used to do so if we weren’t going through the bond market pantomime. So with no bond market and no interest paid on reserves the interest rate would just drop to zero.
Does that make any sense?
I am an MMT noob so apologies if I’ve got this wrong.
If there were no bonds paying interest in reserves might make sense, but the reality is mist MMT proponents woukd support net zero per cent interest rates i.e. after inflation adjustment
If the BoE wants (some time in the future) to set a 5% base rate, it would need to pay 5% on bank reserves. But this would presumably be in circumstances in which inflation is close to 5%, or at least in which nominal economic growth is over 5%. So it would generally be reasonable for reserves to also be growing by 5% a year, too. And the interest can easily be funded by reserve expansion, by issuing gilts equal to the interest and then neutralizing those gilts with additional QE (or, if we are outside the EU, just expanding reserves directly).
There might be specific reasons why it is a bad idea for capital to expand too fast – perhaps too much capital is being used to inflate asset bubbles (in property or shares). But we could always cancel out the effects of paying interest on reserves (or on gilts, for that matter) by setting a wealth tax at an appropriate level. Compare Kalecki’s suggestion that interest on national debt could be matching by a capital tax: https://mronline.org/2010/05/22/political-aspects-of-full-employment/#_edn2
My understanding is that the private sector already had those reserves and invested in government bonds, so they have in effect been given the money they already had back. It is in fact the government that has the extra reserves by virtue of borrowing from itself albeit via a middleman who will take a percentage.
I’ve had a skim of the OBR website. “What we do” sounds it like operates on the basis of assuming all of the fiscal assumptions of the government. In other words, the parameters of its analyses are set by the government’s policies.
I also wonder about the personnel when I see the Advisory Panel includes people from the usual suspects: Goldman Sachs, IFS, PwC and someone who was at Lehman Brothers (whatever happened to them?).
You got it…
The report seems to try and create forecasts to fit to the government’s aim of a balanced budget rather than infer the deficit from likely outcomes. In section 3.78 the report assumes the longest sustained household deficit in at least 50 years in order to balance the budget. It concedes that this is historically unprecedented, but uses it anyway.
You are exactly right
I believe the OBR was formed to try to give Osborne’s madcap ‘policies’ some semblance of the grace and appearance of coherence, of real economic merit. They existed to pretend the Emperor had clothes when in fact he had none, then, and now there’s a new Emperor in town, they’re clearly flailing around trying to justify maintaining their incomes. One imagines the scrapheap awaits.
I’m glad I read the comments not just Richards post before posting my comment as you’ve said all I wanted to and just as scathingly. Bravo!
The idea that you don’t run a government budget like a household surfaces again, in order to claim that there must be even more government spending.
So how should a good household run its budget?
A household has to manage its books because it cannot control its money supply
Nor is its spending its own income
But a government has control of its money supply
And its spending is a major part of the national income
And that is why the two are wholly unalike
QE? You mean like Corbyn was suggesting?
Yes
[…] And we know that if the government sticks to its plans to deliver a balanced budget the chance of a recession that the government has not got the intellectual will or ability to tackle is high, because that was the real message subliminally and almost certainly unconsciously implicit in yesterday’s report on future financial risk from the Office for Budget Responsibility. […]
Thank, Richard, and other contributors for your thoughts on QE and reserves. We are left with the question of why Central Banks might want to pay interest on the massive reserves now accumulated after rounds of QE. We also have the question of why not do more rounds of QE as a systemic method of funding fiscal policy, systemic as opposed to merely responding to a particular emergency. As far as I can see it comes down to the traditional tools that central banks possess for fighting the now-forgotten enemy, inflation. Banks pay interest on reserves to retain one of their monetary tools; they plan to shrink their balance sheets before long to restore their traditional tool, the interest rate corridor. It’s worth looking at this article which explains the different strands of thought on eventual balance sheet reduction by the Fed. https://www.forbes.com/sites/norbertmichel/2017/03/12/its-time-for-the-fed-to-shrink-its-balance-sheet/#30770fb65e15
Noted
My point is simple: why trash the economy to create a tool to supposedly help us manage the economy?
[…] think some wires are crossed here. Yesterday the UK’s Office for Budget Responsibility issued a report saying (if I might, I think fairly summarise) that the UK’s fiscal risk was high, the chance […]