Fiscal austerity is needed; monetary tightening might be needed sooner than thought; and capital controls won’t work in the medium-term. Cheerful prognosis courtesy of the Bank for International Settlements, which has just released its Annual Report.
Chapter one is candid on the threats: “The combination of remaining vulnerabilities in the financial system and the side effects of ongoing intensive care threaten to send the patient into relapse and to undermine reform efforts.”
Stimulus is dead, long live austerity, says the Bank. In line with the G20: “The limits to fiscal stimulus have been reached in a number of countries. Immediate, front-loaded fiscal consolidation is required in several industrial countries.” The policy is not without its risks, of course:
What do you do if you are part of the Group of 20 and cannot agree on a coordinated global economic strategy? Agree to differ and set your best communique drafters to work.
The first thing to do is to find areas on which everyone can agree. Growth is the answer. When have you heard a leader or a finance minister openly advocating policies for stagnation? But alongside justice and education, growth is one of those words everyone advocates, but is meaningless. Growth is not a policy, but an aspiration.
The 2010 emergency Budget has lived up to its historic billing. Huge spending cuts and big tax rises are planned to bring borrowing down from its current rate in excess of 10 per cent of national income.
No allowance has been given to those who worry that such rapid deficit reduction might hit the economy too hard and make it counter-productive. We are back to Lord Snowden’s in 1931, described as an “evangelical Pennine socialist” by Lord Jenkins. I don’t think that description applies to George Osborne; and he must hope his reputation survives better than his 1930s predecessor. Here are four things that have interested me so far.
- The big news. Obviously, real spending cuts of 25 per cent in government departments outside health and overseas aid are big. Very big. This will mean the pain from this Budget will be felt for years and not just tonight. The really interesting thing is that
As a frame of reference, here are my broad brush predictions for the Budget later today. Some things I am pretty sure about, some I am certain about because they’ve been briefed and others are guesses, hopefully educated guesses.
- Fiscal mandate. George Osborne will commit the new government to eliminate the current structural deficit by the end of the Parliament (2014-15). He will also commit to the burden of public sector debt falling year-on-year by the same point.
- Growth. The Office for Budget Responsibility will cut the growth forecasts it released last week for 2011 and 2012 but raise them later in the Parliament, leaving the level of output in 2014-15 very close to that in last week’s announcement. The assumed medium-term Keynesian multiplier will be zero or negative.
- Public finances. Britain’s deficit will be scheduled to fall below 3 per cent of GDP in 2014-15 and will be close in 2013-14.
- Fiscal consolidation. There are
My contribution to Mark Thoma and Motoko Rich‘s call to label the two sides in the raging fiscal stimulus debate. Motoko Rich writes:
The raging debate over what to do about the deficit is now getting its own lingo.
Has philanthropy been overlooked as a means of consolidation? Not in Germany. Fifty-one millionaires and billionaires have apparently formed a ‘Club of the Wealthy’. That club has written to chancellor Angela Merkel, offering 10 per cent of their income for 10 years, in a ‘rich tax’.
Such acts of kindness are all the more rare for being collective. Forming a club, rather than donating individually and noisily, speaks volumes about its members. It also increases the members’ chances to do good, now and in the future, by creating a structure that could attract more people over time, and even survive the 10-year time horizon of its founders. Who knows, the idea might catch on.
This morning the Financial Times is running quite a few Budget stories. My favorites are the pieces about the regional effect of spending cuts, which we have simulated (click on the beautiful maps). These show very simply that whether public spending is cut from social security or from government consumption, it will hit growth harder in the North than South and harder in poorer than in richer areas.
George Osborne’s constituency of Tatton in Cheshire suffers the least of any region on one of the comparisons. The chancellor will like that. Others might take a different view.
Some may say that is a description of the bleeding obvious since everyone know that public spending tends to follow need. Of course it is also not a dynamic model, just some very simple calculations, but they are important in showing the first-round effect of cuts. I have not seen anyone else doing this sort of thing. It might even make Nick Clegg, deputy prime minster, stop and pause before describing spending cuts as fair and progressive. The cuts might well be necessary,
Jean-Claude Trichet has long made clear that the European Central Bank is not over-worried about the impact of fiscal austerity measures on growth, even in the short-run (whatever Washington thinks). The ECB’s latest monthly bulletin has a special section with a lengthy list of reasons why fiscal austeriy need not be so painful. Among its main points, which apply in varying degrees to eurozone countries, are:
(1) the short-run negative impact is lower when “the fiscal starting position is particularly precarious and thus confidence in the sustainability of public finances is rather low,” and when fiscal consolidation is part of a credible reform strategy.
(2) The impact is also less when
The day after the Office for Budget Responsibility produced its initial forecasts for the UK economy, here are five things that are still worth noting.
1 Funniest treatment of a serious issue
For this you must go to the Daily Telegraph. It splashed this morning on a mathematical error. The paper calculated that public service pensions “commitment reaches £9.4 billion in 2014-15. This equates to almost £4,000 for each of Britain’s 26 million households”.
Any fool with a calculator knows that £9,400,000,000/26,000,000 is £362, which is not very close to £4,000 unless the Telegraph has a very loose definition of the word “almost”.
For those who like analysis, the real question is: why is the OBR forecasting that the cost of pensions for health workers teachers, the police and military is projected to rise from £3.4bn in 2008-09 to £9.4bn in 2014-15?
The Treasury does not have a perfect answer, but it does have a good initial explanation. The rise is