As the FT notes this morning, Rishi Sunak is planning a new fiscal rule.
It will commit him to stop borrowing to fund day-to-day spending within three years. And it will require underlying debt to start falling by 2024-25. Why these two things? Because the Treasury thinks that interest rate rises will cripple government finances.
Eight thoughts follow.
First, such rules have never worked.
Second, they always deliver austerity, because that its their real purpose.
Third, interest rates are under government control, and will remain so.
Fourth, in particular, the rate paid on central bank reserve accounts can be any figure the government decides and most certainly need not be base rate and there is nothing the banks who hold such accounts can do about it, so the paranoia on this issue is wholly unjustified.
Fifth, the Treasury has much bigger issues to worry about if rates rise. It's not the state's finances that will topple, it will be the private sectors that will - and no rule of the type Sunak proposes will work in that case.
Sixth, there is a way to prevent the short term inflation which is fuelling rate rise fears right now. It is rejoining the single market, and ideally the EU. That would ease the shortages our economy faces which are forcing short term prices up.
Seventh, a dose of understanding of modern monetary theory would at this moment help the Treasury no end. It is apparent that they still think we are on the gold standard.
Eighth, worry, because it is apparent that the economy is going to be headed for particularly rough times if Sunak gets his way.
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I’ve seen fiscal rules advocated on here such as government should go and buy whatever is for sale in its own currency that it thinks benefits the public. But then raise more taxes when inflation arrives.
Or a more Lilico rule: spend whatever you want as long as there is slack in the economy, you are mainly hiring the unemployed and you won’t pull too many resources away from the private sector.
And rules saying never ever run a surplus, and even never ever have austerity.
Rules like these have been tried. And the outcome apart from the middle one has not been special.
I really think you object to Sunak and his rules, not to rules per se.
I was suggesting how economies work
Rules try to constrain how they work
Very different indeed I think you will find
“And rules saying never ever run a surplus”
Complete straw man (as was the rest of your argument).
MMT proposes no such ‘rule’. Rather it provides insights into macroeconomics that show that sometimes a surplus is necessary (yes really!) and sometimes a deficit is.
Meanwhile those stuck in ‘microeconomic-land’, like Sunak, shackle us all with silly little ‘fiscal rules’.
Sarah,
Making up arbitrary fiscal rules is quite different, just the opposite even, of adjusting fiscal policy as required to regulate the economy rather than having a reliance on monetary policy.
Deficit targets, or more sophisticated fiscal rules, might make some sense in an imaginary world where interest rates are able to be used to successfully target inflation. It follows that fiscal rules make little sense when rates are stuck at their lower bound. MMTers don’t like fiscal rules because they’ve chosen fiscal policy rather than monetary policy to target inflation and regulate the economy generally.
I don’t believe responsible MMTers would ever say never ever run a surplus, and even never ever have austerity. They would say that aiming to run a surplus, or minimising a deficit, was an unnecessary fiscal rule and that austerity was a counter-inflation measure which might be necessary, from time to time, to cool an overheating economy.
Indeed Jim, MMT is all about the ability to see the ‘Fiscal Space’ for what it is, which is the polar opposite of ‘Fiscal Rules’ that artificially restrict and constrain that space.
The bigger picture is its blindingly obvious that the whole, tiresome, ‘Fiscal Rule’ play is ALL about Very Serious Persons (VSPs) showing us just how Very Serious they are. Think Labour’s useless policies.
Its long past time the real adults in the room who really understand macroeconomics – in other words MMT economists – are listened to.
Agreed
Actually, Sunak can’t spell.
It’s actually fiscal GRULE that he is proposing.
PSR, heh, heh. Very good.
Thanks Larry
Fiscal Rule = Fiscal Cruel – that’s for sure.
What are they trying to prove – honestly……………………….?
You’re very likely right that raising interest rates will crash the economy.
However, there’s no chance of the UK rejoining the EU at present for the simple reason they wouldn’t want us back. I’m sure the EU won’t want the aggravation! Brexit may well be a bad job but we do have to make the best of it.
The EU/Eurozone looks like it has its own inflation worries. They aren’t doing any better than us at present. We’re both at around 3%.
https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Inflation_in_the_euro_area
It is naive to say that interest rates are under government control when the government is unable to finance spending without resorting to the markets to pay for it.
The government need never resort to markets to finance spending
That is now proven beyond doubt
So what fantasy land are you living in?
Hugh Counsell,
It seems obvious to even a non -economist like myself that Government does have near total control of interest rates providing we throw out the fiction that the BoE is somehow independent and not a part o Government.
Short term rates are set by the decision of BoE monetary committee.
Longer term rates are influenced, even controlled, by the activities of the BoE in the gilt market. If government wants lower rates it instructs the BoE to buy up more gilts. This it can do without limit. If it wants higher rates it instructs them to stop buying or it could even instruct them to sell. It’s not really a ‘market’ in the way many might assume a market to work.
It’s not a market because the supply of credit is infinite. If the government let banks grant as much credit as they wanted there would be runaway inflation. Ultimately, the interest rate balances the supply of labor with the demand for labor. Don’t confuse this with full employment in the traditional 40 hour work week sense. So yes, the BoE sets the interest rate, but physical resource constraints limit the viable range of interest rates.
Oh, and here is a freebie: Any monetary system without negative interest rates is unable to deal with an oversupply of labor (even if temporary). This is why fiscal stimulus is so effective at curing recessions. It’s simply shifting interest rates back into a range that can be represented in our current monetary system. It’s also why we have 2% inflation targeting. Real interest rates can be negative at the zero lower bound.