bank of england

What is to be done? This question has to be asked of UK economic policy. Only the complacent can be satisfied with what is happening. Yes, the 1 per cent increase in third-quarter gross domestic product is welcome. But GDP stagnated over four quarters and was 3.1 per cent lower than in the first quarter of 2008.

I remain convinced that the decision to move towards fiscal austerity so sharply in 2010 was a huge error. A salient aspect of the mistake was that the UK reinforced the move towards austerity in the EU. In an article entitled “Self-defeating austerity?” published in the October National Institute Economic Review, Dawn Holland and Jonathan Portes argue that UK GDP could well be 4.3 per cent lower this year and 5 per cent lower in 2013 than it would have been without these consolidation programmes, including the UK’s. Moreover, in 2013 the UK’s ratio of public sector debt to GDP might be 5 percentage points higher than it would have been without the co-ordinated contraction. This is a step forward and maybe two steps back.

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Last week saw some important statements on UK economic policy from the chancellor of the exchequer, George Osborne, and the governor of the Bank of England, Sir Mervyn King. I considered the implications for the reform of banking and for the supply of credit and monetary policy in two columns published last week.  I failed to note important implications for fiscal policy. Happily, Jonathan Portes, director of the National Institute for Economic and Social Research did not miss them. Maybe, he noted, we are beginning to see glimmering of light in the policy darkness.

This is what Mr Portes wrote: Read more >>

“Fiscal easing and further use of the government’s balance sheet should be considered if downside risks materialize and the recovery fails to take off. In particular, if growth does not build momentum and is significantly below forecasts even after substantial additional monetary stimulus and further credit easing measures, planned fiscal adjustment would need to be reconsidered. Under these circumstances, gains from delaying fiscal consolidation could be larger as multipliers are estimated to move inversely with growth and the effectiveness of monetary policy. To preserve credibility, reconsidering the path of consolidation should be in the context of a multi-year plan focused on further reducing the UK’s large structural fiscal deficit when the economy is stronger and taking into account risks to sovereign borrowing costs. Fiscal easing measures in such a scenario should focus on temporary tax cuts and greater infrastructure spending, as these may be more credibly temporary than increases in current spending.”

The above quote is from the concluding statement of the International Monetary Fund’s mission to the UK for the so-called Article IV Consultation, released on 22 May 2012. Read more >>

Part I

I admire Peter Sands, the group chief executive of Standard Chartered. Unlike many of his peers, he does not rely on making arguments behind closed doors. He is prepared to make arguments publicly, instead. He did this in a piece he published in the FT last week (“The dangers of our new regulation”).

The fact that I admire Mr Sands, does not mean I agree with him. On the contrary I found this article valuable, not because I thought it right, but because I found it revealingly wrong.

Mr Sands starts by saying that Standard Chartered (a bank that has, by the way, almost no business in the UK) supports the idea of macro-prudential regulation.

Nevertheless, he argues, the approach taken by the Bank of England’s interim Financial Policy Committee to which responsibility for such regulation will be transferred in forthcoming legislation is “extremely interventionist and extraordinarily blinkered”. Read more >>