Rishi Sunak gave evidence to parliament yesterday on his budget proposals.
According to the Guardian:
Rishi Sunak has rejected criticism that his budget plans to repair the government's finances after Covid-19 were unrealistic, and insisted a 1% pay rise for NHS staff is fair.
The FT, meanwhile, said:
A rise in global interest rates that could destabilise the UK's public finances is one of the risks that keeps him up at night, chancellor Rishi Sunak told MPs on Thursday.
Ignore, for a moment, the differing priorities of the two newspapers and concentrate on Sunak.
The pretence that he presents is that he cannot afford a pay rise for nurses (total cost less than £1 billion in his proposal) because of his fear that interest rates might rise and he will have to pay them.
There is in here the most enormous misrepresentation of the truth. As ever, Sunak would like to appear to be the victim of ‘the markets', constrained in what he does by the forces of finance that are beyond his control. The claim that a 1% rise in interest rates will cost £25bn has become the defence against all claims for further spending and the justification for austerity.
I have addressed this issue before and I will unashamedly do so again. This representation of Sunak as a victim of the markets is not true.
First, Sunak sets interest rates. I know there is a pretence that the Bank of England does, but he can over-rule them. He might need to do so now.
Second, it is ridiculous to claim that the government is the victim in all this. The last decade has shown the exact opposite. The government can control both short and longer term interest rates with considerable impact on actual rates precisely because it owns so much debt, and because of the structuring of that debt as a result if QE. If interest rates rise then this will be the result of a government decision. No one ekes will be responsible.
Third, to be clear, most UK government borrowing is very long term. That means interest rate changes have almost no immediate impact on it in that case.
And fourth, the fact that the government has replaced £800 billion of its bonds with what are in effect deposit account balances held by the commercial banks with the Bank of England is also not a threat. I am well aware that Bank if England base rate has been paid on these accounts to date but that does not mean it has to be: the Bank of England is at liberty to increase base rate and pay a differing rate on these accounts if it so wishes and there is nothing that the commercial banks can do about it. They cannot even withdraw the balances. So, again, Sunak is misrepresenting the options available to him.
But it is terribly convenient to do just that. He wants an excuse for austerity and to crack down on the NHS. Suggesting that the owners of wealth - and their demand for unearned reward are the priority, which is what he is doing - has to be the most crass excuse for repression yet invented. The excuse is ‘I am sorry I cannot pay you fairly for your work because I have to unfairly pay the wealthy the reward for not working instead'.
And that is precisely what he is saying. His argument is he will concede to the pay demand of the wealthy and punish those on whom we are utterly dependent to do so even though he has a whole armoury of tools available to resist interest rate rises. He is just going to refuse to use them.
No one should be fooled by Sunak. He is just another rentier capitalist out to fleece the state and those who work for UK for the benefit of the 1%.
There is something deeply rotten in the state of the UK. Have no doubt that Sunak is very much a part of it.
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“First, Sunak sets interest rates. I know there is a pretence that the Bank of England does, but he can over-rule them. He might need to do so now.”
You imply the Govt/ BofE can control the term structure of interest rates indefinitely. This is not true. It applies only to the point they can use QE. QE cannot be used indefinitely. It is disingenuous to suggest it can. Whether inflation is on on the horizon or is way in the distance doesn’t matter. At some point control of interest rates goes. It’s akin to fiscal policy to assume Govt spending can cure all ills. It can to a point then is curtailed and reversed when inflation hits an economy..now you might think inflation is not a problem and I probably think for the near term you might be right. But you or I do not have a crystal ball. And in the US post Biden there is a groundswell of opinion fearing inflation. When the Fed or the BofE decide they can no longer use QE and message that to the markets long term interest rates will destabilise very quickly
So, your argument is QE cannot be used indefinitely, but when its use ceases the markets will destabilise.
Three questions.
1) Why can’t it be used indefinitely? Reference Japan, please. And use facts, nit rhetoric.
2) Why would a government decide to destabilise markets, as you suggest they will?
3) Are inflation fears real. Reference the work if Danny Blanchflower please and say why he us wrong, using facts please.
As it stands, what you are saying is the government is going to choose to blow up the economy. The evidence that is lacking is why it would choose to do that. Over to you to tell us.
…. and
4) How do you intend to recruit the tens of thousands of health workers that we need? (France, I believe paid a one-off bonus to staff and raised pay by 10%…. and they don’t have monetary sovereignty. Yet the world has not fallen in).
5) How do you intend to transform our infrastructure to meet the challenge of climate change?
Will “Mr. Market” do it? No.
Now, I do not disregard your concerns – it is entirely possible that at some time in the future a government chooses to keep spending when the economy is capacity constrained and continues to keep long rates low through QE. No doubt this would lead to a sterling crisis which creates various problems (not least, more inflation).
My question is – are you prepared to accept the status quo just in case that, at some point in the future, the government of the day, makes a policy mistake? Personally, I would rather take action today…… after all, in the long run, we are all dead!
Well said
If you think inflation can NEVER be a problem then QE can be used indefinitely. If you think it will then QE cannot.. it’s that simple.
If QE is withdrawn (because of inflation) then a correction in long dated Gilts, Treasuries etc is likely to be dramatic. Obviously an essay can be written on the consequences of this but it is wholly negative. And the longer we are accustomed to long term rates suppressed by QE then the more painful it will be when it is removed.
Using Japan as a precedent for every other economy is about as valuable as using Venezuela, Zimbabwe or Argentina.
So, no answers at all
Just tropes
“So, no answers at all Just tropes”
I said QE cannot continue indefinitely because at some point we hit inflation.. you think we will never hit inflation or if we do then we continue with QE to suppress long rates and near the consequences..
What more can I say?
And when we hit inflation – tell me, what is wrong with taxation as an instrument of control?
“And when we hit inflation — tell me, what is wrong with taxation as an instrument of control?”
So with your logic you tax and continue with QE to keep term rates rates suppressed.. QE is injecting liquidity into the system at a time when tax is taking it out. To state obvious you would have to significantly tax harder to keep QE.. is this what you are suggesting?
I have two guesses about you
One is you are pretty stupid
The second is that your continually changing email address proves you are a troll – the small variations are indicative of the breed
The third is that you actually know nothing about what you re asking or you would not ask it
In other words, I am not wasting my time further here
Richard,
You mention taxation to control inflation. I have some questions regarding this.
1. How much would you have to raise taxes to control a given amount of inflation? For example, if the target is 2% and CPI rises to 4%, how much would taxes in general have to rise?
2. Tax stability is important to an economy. It is very hard to plan ahead, and it makes the business environment much less appealing if taxes change potentially dramatically every year.
On top of that, taxes must be changed relatively far in advance of implementation, and do not have a linear effect (avoidance, interaction, substitution etc). This means it is likely to be very difficult to actually manage the process of using taxes to control inflation in practice, because a given tax rise may not have the intended effect.
Do you acknowledge this issue?
3. It is well understood, through plenty of research that inflation hurts the poorest in society most. It is also well understood that the poorest in society have the largest marginal propensity to spend, whilst the rich have a much larger marginal propensity to save.
Given that a main driver of inflation is the marginal propensity to spend, to control this inflation tax rises would have to be targeted at those with the highest marginal spending. Which means the poorest in society. Simply as taxing rich people more might raise some revenue, but not have much of an impact on CPI, given their low marginal propensity to spend.
For your policy of controlling inflation via taxation, you would inherently be arguing for significant tax rises on the lowest earners and poorest in society. It strikes me that you policy of printing and spending money on a continuous, ongoing basis is likely to generate inflation – which hurts the poorest the most. Yet the solution you have for controlling that inflation would have to be targeted primarily at the poorest as well to have any significant effect.
Are you aware of this, and does this fact not make your policy politically unworkable and ethically unfair? It is likely to generate far greater inequality and more poverty.
Let me ask you some questions. If you can answer them precisely and with evidence then I will attempt to answer your questions.
1)How much would you have to raise interest rates by to control a given amount of inflation? For example, if the target is 2% and CPI rises to 4%, how much would taxes in general have to rise?
2) Financial stability, including the cost of finance, is important to an economy. It is very hard to plan ahead, and it makes the business environment much less appealing if interest rates change potentially dramatically every year, or even more often.
On top of that, interest must be changed relatively far in advance of inflation impacts arising to work, and do not have a linear effect. This means it is likely to be very difficult to actually manage the process of using interest to control inflation in practice, because a given interest rise may not have the intended effect.
Do you acknowledge this issue?
3)3. It is well understood, through plenty of research that inflation hurts the poorest in society most. It is also well understood that the poorest in society have the largest marginal propensity to spend, whilst the rich have a much larger marginal propensity to save.
Given that a main driver of inflation is the marginal propensity to spend, to control this inflation interest rises would have to be targeted at those with the highest marginal spending. Which means the poorest in society. Simply as raising returns to rich people might raise their incomes, but not have much of an impact on CPI, given their low marginal propensity to spend.
For your policy of controlling inflation via interest, you would inherently be arguing for significant interest rate rises on charges on the lowest earners and poorest in society. It strikes me that your policy of printing and spending money on a continuous, ongoing basis is likely to generate inflation — which benefits the richest the most. Yet the solution you have for controlling that inflation would have to be targeted primarily at the poorest as well to have any significant effect and yet would befit the richest greatly.
Let me know
I was a bit like Rob Gray, interested in your discussion with Jason.. I was hoping you would “demolish” his theme using rational argument as opposed to just cutting him off??
I see the point he is making. If taxes need to go up to stem inflation they will have to go up much more if we persist with QE? After all QE is a form of money creation/printing. Wouldn’t it be politically sanguine to stop QE before increasing taxes if we have inflation? Or am I missing something?
You do realise that QE is just an asset swap?
QE cannot create inflation
Deficits can
Jason missed that point
Do I need to explore it?
“You do realise that QE is just an asset swap?”
As I understand money is created at the central bank and is used to purchase gilts/ treasuries from regular investors.. so it is an asset swap to the extent cash is received for govt securities.. but at much inflated prices. Not that I do but if I owned gilts I will be sitting on a positive gain as the Govt / BofE drive prices higher. I can now spend this cash on goods/services hence I see it inflationary .. also by driving up prices long term interest rates are reduced and have been to nearly zero or negative in some places. So less mortgage expenditures, cheaper loans etc again inflationary. But the beneficiaries are the owners of assets ..why persist with QE and raise taxes instead??
Again maybe I am missing something but to me I would feel happier will stopping QE before increasing taxes. Interested to know your thoughts why you would continue QE?
Sorry, but your question makes no sense
You don’t stop QE before tax changes
As I said QE is an asset swap. It is unrelated to tax.
So what are you actually asking?
In response to Clive’s post at 10:03am, NHS Scotland, like France, has awarded a £500 one-off pro-rata Covid payment to all NHS staff (‘pro-rata’ means the award for part-time staff is proportionate to contracted hours). All staff have been given an interim pay-rise of 1% for 2021-22, back-dated to I Dec 2020, with a final uplift in the summer once pay negotiations have been concluded. These negotiations have been delayed due to the late disclosure of the UK Budget which meant that the Scottish Gov couldn’t finalise its budget before 31 March.
https://www.gov.scot/news/nhs-staff-interim-pay-rise/
I’m not sure I quite believe what I am reading. You have made no attempt to answer my questions, and instead have tried to turn them back at me. This is incredibly childish.
I can only suspect that you have no real answer to my questions.
As for interest rates and inflation:
1. We know that real rates and money supply are the main drivers of inflation. Fortunately both are fairly well correlated with inflation. So for a roughly 2% rise in inflation, given relatively constant money supply growth, rates would have to rise roughly 2%.
2. Through experience, we know interest rates take about 6 months to feed through to inflation. The effect is also essentially linear.
3. Whilst interest rate rises would affect the poorest in society through higher bills, the distribution is much more evenly spread through the strata of wealth and earnings. Higher interest rates would also mean that many would be better off through higher returns on pensions and other fixed income savings.
Even then, the pain people feel from higher rates will be mitigated by the fact that real rates are the actual driver of the increase or decrease in wealth and/or net income, and given interest rate moves are highly correlated to inflation, moves in real rates would be far less dramatic.
Whilst there would be winners and losers from higher rates, the effect is not as dramatically focused on the poorest in society as it would have to be in order to use taxation to control inflation.
Now I have done you the service of giving you a proper answer (to my own questions), would you do me the courtesy of actually answering the same please? I do not mean with more infantile rhetoric.
I see you claim to be a Professor of economics. Surely answering relatively straightforward questions about a policy you have proposed and are making claims about is not beyond you?
First, thank you for revealing yourself as a troll. It always helps to know.
So let me answer your claims.
1. No we don’t. There is absolutely no evidence to support these claims.
2. Wow. Try to find a central banker who thinks it that easy. This is laughable.
3. This is even more risible. Monetary policy redistributes wealth upwards, inevitably. The impact on the poorest is very obviously very high, and on mortgage players much bigger than any tax change. Your claims are ridiculous . Oh, and higher rates depress investment and so kill real wealth creation.
So you could not answer, at all. You also show you would not understand my answers if I gave them. So I suggest you read my work and that of others before making a fool of yourself again by claiming the economy is a simple machine that works to monetarist precision when it does not. When you appreciate that the nuance of any answers I could give – because nuanced they would be – would be within your grasp.
Your childishness does not make me a troll. I have asked you very clear questions, which you seem unable or unable to answer. When I asked you twice to do so.
I am surprised an academic, no less a Professor, would behave in this manner.
1. Fisher and Fama both wrote very famous papers, which have been extensively tested to show the relationship between rates and inflation, and money supply and inflation. There is a strong correlation. I assume you understand what that means?
2. It does certainly become more difficult at the zero lower bound, because of the effect of low or negative nominal rates. That doesn’t mean that the relationship does not exist. As for the lag – there are again many papers detailing it.
3. So, in your logic, both raising and cutting rates redistributes wealth upwards? You also seem to think rates should remain low for ever, reading in to what you are saying. Which means that as inflation rises, real rates will become even more negative. This in turn means the poorest in society will experience the greatest loss of purchasing power.
Again though, we have plenty of data to back this up. The SNB did a global study, as did the world bank and OECD and found that rising inflation rates are highly correlated to rising income inequality.
Higher rates do depress investment, but on a much more marginal level than dramatically higher and unpredictable tax rates, or indeed high inflation/negative real rates. Again, studies.
So I think I have answered pretty comprehensively. I can post links to various (hundreds of) papers if you feel like it.
I am also certain I could understand your answers. I am not sure why asking you questions, disagreeing with and posting detailed replies has led you behave in such an abusive manner.
So far you have not provided for the questions I have asked. Claiming I will not understand what you say is perhaps the weakest excuse I have ever heard. Try me. I can only assume that you are unwilling to answer as you don’t actually have any. No theory, no practical examples, no evidence, just you making claims of fact – even when those facts you utter are in direct contradiction to well understood and observable dynamics.
You are hardly the first person to think of using parts of fiscal policy to manage prices, but those who have come before have studied it and found it to be inefficient, impractical and much more damaging than the monetary policy alternatives.
I was polite enough to ask the questions, expecting some reasonable form of answer. Instead I was treated to the kind of argument you would get from a child, not an academic.
Why not act as such and go back to the original questions I asked and give us answers. Having shown this thread now to quite a few people, many are waiting eagerly to hear how exactly you would achieve your goals when the results would be unreliable and damaging.
Some, to be fair, are just shocked by you. Surprise us all by giving us a straight answer!
I am very sorry that some are shocked by me, although to be candid, I think that some are shocked by the most obvious of things, so that I doubt I can do much to help them by changing my behaviour because what you are really saying is that some are shocked by the fact that someone might have the temerity to disagree with them.
I am also sorry that you think anyone arguing with you, using your own arguments to show that you cannot prove your claims, is childish. It’s an interesting line of argument, if only because it reveals your own inability to make your case. That was why I used it. If your alternative policy cannot meet the criteria you demand of me then it’s really not much of an alternative. Why seeking to demonstrate that is the case is childish is rather hard to imagine. But it is decidedly trollish, whilst my behaviour is exactly what I would expect of a professor. One if the things we do is test the power of the argument we are presented with. Yours, as I have already noted, fell very short.
To answer your points. Read Adair Turner’s report of 2009 on efficient market hypotheses. It is an amusing dismissal. The relationship holds, until it doesn’t, that is. And it has not for a long time. Nor, candidly, could any rational person now believe it does given what we now know about the nature of markets and the reality of the deliberately engineered distortions within them.
Re point 2, thank you for agreeing that your claim is not true. It isn’t.
Re 3, yes that is my suggestion. The reasons are different, but the wealthiest rig markets so that they always win. Shocking, isn’t it? But that is not the same as rising inflation.
Of course significant inflation is a curse. Thankfully it is also exceptionally rare, and disappearing. The 50 year trend is strongly downward, to which independent central banking has contributed almost nothing. So the reasonable question is why you think serious inflation at all likely when it isn’t?
In fact, the serious question is why we can’t actually generate enough of it and why we would want to tackle any modest inflation that arises now?
But as to your original questions, the answer in all cases is ‘it depends’. Depends on what? Whether we get inflation. What its cause at the time might be. Whether we want to tackle it. What the state of the U.K. the economy was at the time, and so on, and on.
You see, economics is not a science, it is an art. And the number of variables is very high,so simplistic modelling can’t answer precise questions of the type you pose because unless crass simplifying assumptions (beloved of many economists but wholly unrelated to the real world) are made answers cannot be given. Answers require judgement at the time, and learning from experience. Experience is that monetary policy is very unlikely to work in any situation we will face if (very big if) we face inflation again. So judgement would have to be used.
Now that’s what’s called a grown up answer. I am not interested in your response so I would not bother to post it.
Johan said “Having shown this thread now to quite a few people, many are waiting eagerly to hear how exactly you would achieve your goals when the results would be unreliable and damaging.”
This are hilarious, I assume those few people are the ones that occupy your mind and like to switch accounts on this blog of late. Your MO is pretty obvious to be honest ,you may need to find another blog to troll. You are a source of amusement here.
Interest rate setting is a busted flush. It never has worked to any wider benefit…… in history, and as to 100’s of papers backing that, you can throw 100 % of any of those in the bin. That’d also be the same 100s of economist who failed to predict the last great financial crash. I’d guarantee that 99.9 % of them failed to see it coming. And if economists as a whole cannot even predict such a glaringly obvious catastrophic failure , we should have little faith in much of what mainstream economic theory says. Most of it is theoretical nonsense that has no bearing on reality whatsoever.
So QE is an “asset swap”.. can you clarify please?
And you say QE is not inflationary even though it reduces the cost of money by reducing interest rates and injects hugh amounts of money into the coffers of investors by buying gilts off them at inflated prices? I really don’t see why this isn’t inflationary?
Thanks
I would
I could
But on the other hand you are already displaying classic troll characteristics (which when you have been trolled as much as I have been become fairly easy to spot), and that means I will not be doing so.
I have better things to do with my day than waste it on a troll.
“Groundswell of opinion fearing inflation”?
Well that could be unfounded,probably is. Most people behave like lemmings in any case and that includes markets. What we need to rational thinking here not emotions.
We can’t afford to give healthcare workers the modest pay rises that had already been budgeted for – or indeed a special one-off bonus as many private businesses that have remained successful have – but we can afford to give away £12 billion in capital allowance “superdeductions” to companies for two years (much of which will be dead weight) and to defer the increase in corporation tax to 2023 (if, like the 17% rate, it ever happens). We can afford to piss money away on useless overpriced PPE corruptly paid to friends of ministers, or expensive daily rates for consultants for test and trace, and then to spend hundreds of thousands defending the indefensible in court. We can afford to increase unproductive defence spending. We can afford to put protesters in prison for 10 years (costs about £40k per year) if they are not quiet enough.
We are very much on the slippery slope to a sticky end. The shamelessness mendacity of this government makes me fear for the future, in a way I don’t think I ever have before.
Me too…
Sunak says that the £1billion is all the country can afford for nurses.
Let’s see, Test and Trace cost £39billion over 2 years. The Guardian says “The £22bn already spent is hard to justify in the absence of proof that it worked.” That’s 22 times what Sunak wants to pay the nurses. I wonder if that £39billion keeps Sunak up at night? Or perhaps the Government’s handling of PPE and the billions handed out to mates of the Tory Party?
https://www.theguardian.com/commentisfree/2021/mar/10/the-guardian-view-on-test-and-trace-count-the-true-cost-of-failure
Today we are told that exports to the EU fell by £5.6billion in the first month after leaving the EU, but I suspect the Tories will tell us its nothing to do with Brexit. Teething problems no doubt. This will surely have more effect on market sentiment than the cost of a decent pay rise for the nurses? I can think of lots of things that would and should destabilize the markets. A decent pay rise for nurses is not one of them.
Someone should remind Johnson that it was those nurses that helped save his life.
If the Tory support in the opinion polls holds up after this “we can’t afford to pay the nurses any more” lie, there is no hope for us.
Richard
Orthodox economists & commentators are going to continue their ” concerns ” about inflation & the markets
I can ( just about )follow the MMT alternative
but can you please demolish their argument because I can;t quite see specifically the markets — which markets & why ? would want to encourage inflation
Your response to Jason tends to hint at the issue without specifically demolishing it
I will have a go…
Jason seems to imply that the markets, ie banks, fund managers, currency traders and so on, are more powerful than the Fed or the BoE and other central banks who act on behalf of monetary sovereigns. Stephanie Kelton discusses this in her recent book. As she says (and you have said) monetary sovereigns don’t have to borrow from the market.
“Bond sales are entirely voluntary, and the interest rate paid on any bonds the government chooses to offer is always a policy choice.” The Deficit Myth, Kelton S.
Quite so
And completely true
This post is a cracker. Get it up on Twitter if you can – and fast.
We’re looking at subjugation through poverty aren’t we?
And what I think I’m seeing is a result of 2008 – the 1% know the game is up and instead of moderating and reflecting, they’re just going for it instead – unapologetically, clinically and ruthlessly just in case too many of us work out what exactly is going on.
Be in no doubt that this is driven by fear and the desire to retain their position.
And because fear is involved they’ll over chance their arm. We can only hope that when they go too far, it will just as the moment when the opposition might get itself into gear or something else changes public opinion.
I offer only hope of course, not certainty.
I was wondering about a thread – maybe tomorrow morning…
You quote the FT saying Sunak is kept up at night by a rise in global interest rates that could destabilise public finances but then your blog deals with domestic rather than global interest rates. I wasn’t sure exactly how a rise in global interest rates could destabilise UK public finances so I went to the article but the only mention of global rates is in the opening sentence, the one you quote, and all the quotes from what Sunak said are for domestic interest rates, so I went back to what was originally said. There is no mention of global interest rates so if you do a Twitter thread I would recommend not mentioning global interest rates as it doesn’t look like he spoke about them
He does talk about being kept up at night and about interest rates but not together. He is asked about what causes him to lose sleep at night and his answer is all the unemployed people and how he can help them. Most of what he said about domestic interest rates is covered in the FT article, but there are a few more details. In regards to the discussion in your comments section above about QE and inflation, Sunak is asked “If inflation becomes an issue, are you concerned that you do not have that quantitative easing and that effective buyer of gilts?” and his answer is he can’t comment on QE because that’s monetary policy.
https://committees.parliament.uk/event/3963/formal-meeting-oral-evidence-session/
So?
How does that change my argument?
I wasn’t suggesting that it changes your argument. I was only pointing out that the quote you included is incongruous with the argument in the blog and is also not accurate (to be clear you accurately quote the FT but the FT quote itself is not accurate). The blog is good and the argument you present is good, I just think it can be confusing to attach to it a quote that is not accurate and suggests something different to the rest of the blog. I think clarity and accuracy is important, even on smaller details.
OK, noted
Richard, a couple of queries on your original post.
You say
“Third, to be clear, most UK government borrowing is very long term. That means interest rate changes have almost no immediate impact on it in that case.”.
Could you explain ?
” I am well aware that Bank if England base rate has been paid on these accounts to date but that does not mean it has to be: the Bank of England is at liberty to increase base rate and pay a differing rate on these accounts if it so wishes and there is nothing that the commercial banks can do about it.”
Did you mean to say ” the BOE is at liberty to DECREASE base rate….” ?
The rate on most borrowing is fixed, is what I am saying in the first point, so like on a fixed rate mortgage, increasing rates makes no difference to what is actually paid in most government debt
And on the second I did mean wha4 I wrote. The BoE can increase base rates and set a different rate for the central bank reserve accounts.