There was a deeply depressing editorial in the Financial Times published overnight on the subject of Sajid Javid and Boris Johnson abandoning George Osborne's fiscal rule that current government spending should be funded by taxation. As they said:
[T]here is one important difference between the two approaches. Mr Osborne stressed his commitment to fiscal credibility and a framework for keeping the public finances on a sustainable path. Mr Johnson appears to have little concern for rules. His pitch for the next election is based on eye-catching promises on health and crime with scant attention paid to the state of the government coffers.
The FT's logic has to be discerned from a number of comments, as the piece is not very well written. Start with this:
Yet the government has little capacity under its current rules to spend even slightly more. The fiscal “headroom” left by the previous chancellor, Philip Hammond, has already been spent by Mr Javid on funding for health and the police.
Continue with the claim that:
This all means the government is reaching the point where tax receipts no longer cover day-to-day spending on public services.
And note that they approvingly state:
Reducing this “current budget deficit” to zero was a key Conservative goal before Mr Johnson took over. This was achieved in the last fiscal year but, over the past five months, the current deficit has begun to rise again as the economy has weakened.
Grudgingly they suggest that:
There is room to debate whether borrowing to invest in infrastructure – which creates an asset to match the debt – should be treated as outside the normal constraints on spending. Economists are increasingly calling on the British government to take a “whole balance sheet” approach to the public finances, in which the government would consider both the resources it owns as well as the debt it owes.
But they immediately dismiss that argument, suggesting:
Yet the Treasury should not borrow to fund public services when Britain is close to full employment. Instead, services should be funded by the taxes paid by workers and businesses.
Their conclusion is:
Mr Osborne does not deserve the final word on fiscal rules. But if the government wishes to break with the approach of previous chancellors, it should set out a new framework. Investors concerned by the Johnson government's indifference to playing by the rules – whether they are legal or parliamentary convention – should be given no further reason for doubt.
Regular readers of this blog will know that I have little time for rules of this sort.
The argument that there is an absolute rule suggests that
Gc = T
Where Gc is current government spending and T is current tax yield. This is matched by a suggestion that
Gi = ∆B
Where Gi is government investment and ∆B is the change in government borrowing in a period.
I suggest that these two formulas represent a crassly chosen book-keeping constraint chosen by those with no understanding of the macroeconomic consequences of government behaviour.
The truth is that there is a formula worth noting when it comes to government spending, which is
G = T + ∆B + ∆M
Where G is total government spending and ∆M is the change in government-created money in a period. It should be said, however, that this formula is not a constraint. It is instead an identity: a statement of what is true, come what may. As a result it cannot constrain: it is simply what is the case.
Instead, the choice to be made is to be found somewhere else entirely. There are two of them to be made. One is in the definition of what is full employment.
Very obviously we are nowhere near full employment at this point in time. We have an economy where people are seriously underpaid. We have low productivity. And we have very large numbers of people in vulnerable employment or intensely marginal self-employment. To claim that this is full employment, as the FT does, is an act of self-delusion. The capacity for growth in real employment is very significant in the UK. In other words, there is no constraint in this area, and absolutely every reason why the government should want to act to stimulate improvement in the employment market, which additional spending would do.
The second choice is with regard to inflation. Here the issue is what rate we want, and what rate the economy will tolerate. A 2% rate is entirely arbitrary: there is no proven reason why it needs to be that rate. In any event, ignoring capital asset price inflation whilst imposing this constraint has created the most enormous disparities in wealth in this country which need to be corrected by income inflation. So, whilst there is an inflation constraint it is very unlikely that we are near it.
But, and this is my key point, if there is to be a fiscal rule then it is simply stated, and is that a government should maximise employment for those who want it at levels of income sufficient to sustain those in work whilst managing inflationary impact.
That is a fiscal rule. What the FT proposes is actually a monetary one. The FT can't even spot the difference.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
….but monetarism is the only game in town…. 🙁
Mandy Rice-Davies’s observation never loses its relevance. What else would you expect the FT to express – however clumsily it might be expressed? Its readership are those who are doing very well under the current arrangements – and those of its readership in the top 1-5% ultimately determine the thrust of economic policy.
Those enjoying wealth and exercising economic (and political) power at the time were well aware of the essential elements of what is now labelled as MMT when Dollar-gold convertibility was abandoned in 1971 and all currencies became fiat currencies. And it filled them with dread and terror. The dragons they sought to either slay or shackle were democratically elected governments applying fiscal and economic policy in the broad public interest and the risks of increasing general inflation and currency depreciation – with a resulting reduction in their wealth and power. The existence of institutionally embedded inflation expectations provided some cover for the major shift in economic policy in the developed economies from the 1970s onwards, but it certainly didn’t justify it.
And so we have ended up with what Simon Wren-Lewis calls the Consensus Assignment with fiscal policy being largely emasculated and technocrats in so-called independent central banks being given responsibility for economic stabilisation relying exclusively on monetary policy tools.
With increasing financialisation of the developed economies, growing inequality, ongoing wage suppression, increasing deficiencies in aggregate demand, falling profit rates for productive activities, policy interest rates at historic lows and the central bank technocrats scurrying around looking for ever more exotic monetary tools to maintain even a semblance of relevance the credibility of this long-standing fiscal and monetary policy consensus is threadbare. But this won’t stop the wealthy, powerful and influential from furiously peddling the fiction that this policy mix is eternally valid.
The extent of the support that this fiction has garnered among the more powerful and wealthy echelons in developed economies has generated a momentum that is resistant to even moderate modifications of the policy mix. So it is not surprising that it is being most forcefully rejected by those on the extremes of the political spectrum – with the majority of citizens who sit between these extremes angry, confused and discontented and lacking effective representation. Almost all of those who might give them a voice have been compromised by their adherence to this policy fiction which has brought so much misery to so many.
The Economist has usefully provided profiles of two influential figures at the extremes:
https://www.economist.com/britain/2019/09/29/cummings-and-milne-rival-advisers-bent-on-disrupting-british-politics
“Mr Osborne does not deserve the final word on fiscal rules.”
He in fact, in common with anyone that has ever had any association with the concept of “expansionary fiscal contraction” (unless that was pointing out how utterly absurd it is) doesn’t deserve any word on economics at all.
Is the FT not just guilty of inconsistency and the fuzzi thinking that results from it?
The implosion of mainsream economic conservatism, doesn’t just affect BJ and his political party, it is deep-rooted and confuses all mainstream economic conservatives – even when they delude themselves to the contrary and write inconsistent fuzzi-thinking editorials.
The tide’s turning and the FT is maybe just confused and disorientated by the paradigm change.
Still bad journalism though. Richard Murphy at his incisive best.
Thank you