As the FT has reported this morning:

Higher inflation caused by the Iran war will cut the real-terms value of UK public spending by £24bn by the end of the decade, forcing chancellor John Healey to make tough choices to keep debt in check and fund new policy commitments, an influential think-tank has warned.

They added:

The National Institute for Economic and Social Research (NIESR) said the energy price shock was set to push inflation up to a peak of 3.8 per cent in early 2027, with the Bank of England returning it to 2 per cent only in 2029.

Almost every aspect of this report is depressing.

The whole premise of this think tank's work is the belief that because there is a war in the Gulf over which we have no control the UK government must cut its spending budgets in real terms because it is believed inevitable that the Bank of England must increase interest rates in the UK to counter inflation and that government borrowing costs will rise as a result and so, to comply with arbitarty fiscal rules regulating debt ratios, other elements of government spending must be cut.

That is presumed to be the case although there is no link whatsoever between UK interest rates and any change to the cost of oil resulting from that conflict, meaning that the change in the Bank of England base interest rate giving rise to those additional government borrowing costs will not in any way alter the rate of UK inflation, unless it is to increase it by increasing the cost of money itself.

This also assumes that UK debt must be contained even though there is no evidence that this is necessary, most especially when the risk of a recessionary environment exists.

As an example of the profound poverty of thinking that pervades so much of modern economics, this is a perfect example. Two uncorrelated activities, war and UK interest rates, are related in a way that is deliberately construed as creating a requirement to cut the level of spending that the UK government can undertake solely because it is assumed that entirely arbitrary inflation and debt targets must be achieved.

The reality is that external cost adjustments must, as a matter of fact, work their way through our economy, with wages and prices being allowed to adjust as a consequence. No interest rate adjustment is required as a result.

Nor is there any change in government spending required, because the fiscal rule that says this is necessary is itself entirely arbitrary and inconsequential for absolutely anyone but those economists who have made it into a false idol, and the politicians who declare it to be a sign of their virility.

What this report is, then, saying is that because we have set meaningless inflation targets and debt targets, and couple these to a wholly incorrect understanding of how to manage inflation created by activity beyond the UK economy, the government must impose additional voluntary costs upon itself by increasing its interest expenditure. That additional cost will benefit those with wealth in the economy whilst requiring cuts to government expenditure, which will both harm those who are dependent upon government services and simultaneously depress economic activity within this country in a way that can only assist the onset of recession, which is a risk that the increased oil prices that we know we face will, in any event, create.

What we end up with, therefore, is a set of economists who are quite unable to work out the real linkages, needs and demands of the economy in which we actually live, who are demanding, on the basis of their artificial constructs, that we voluntarily punish most of the people of this country because of events over which they have no control, whilst simultaneously benefiting a few whilst leaving the country as a whole worse off.

Why is this depressing?

That's because this is the perfect example of incredibly poor economic thinking creating bad economic outcomes by deliberate design because of the inability of those promoting these ideas to imagine any alternative to the false mantras that they have created.

If the NIESR gets its way, we will have a worse recession than we already risk facing. That would be a policy choice, not a necessity. That is why this is depressing.

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