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r the electorate about the spending they need to make for public services as the cps says hard decisions are put off but another way of putting this is that everyone politicians voters and many right wing think tanks have conspired in a fiction that a future government can run public services on far lower resources than they in fact need i have been complaining about this for a dozen years now i am not going to be so petty as to go back over everything the cps has said on spending but i would be amazed if they have been urging realism on this topic realism means preparing the voters for higher taxes or drastically curtailed services it feels unfair but everyone has the right to play one truss card and i remember very clearly their enthusiasm for that let s cut taxes like crazy i am sure we can find the spending cuts later moment in a much more hawkish mood now the cps nobly suggests that governments should adopt a charter that includes strategy for addressing long term spending pressures identified in the obr s fiscal risks reports well bravo but they immediately notice the contradiction they have been caught on in this glorious acknowledgement of course any long term models of spending and debt should be treated with caution and not used to replace today s arbitrary targets with even hazier ones decades hence their usefulness lies in that they show broad trends and can indicate whether current tax levels are adequate for projected levels of spending and force politicians to confront those choices so this is why i am confused if you want to show whether current tax levels are adequate for projected levels of spending and force a confrontation you have to forecast the state of the economy for a good few years those forecasts will keep changing and you will have to respond or it is meaningless so how does that leave us substantially in a different place to where we are now i am also confused that they want chancellors held accountable for current year outcomes i e be responsible for failing to hit past forecasts without spelling out how this would actually change behaviour suppose a chancellor learned half way through the year that rates were rising revenues falling and current year deficit going to be blown right through is the cps idea that the chancellor just looks ashamed or that they adjust policy if the former nothing has changed if the latter this would trigger the kind of in year tax rises and spending cuts that are supposedly a fault of the current fiscal rules or to quote their own eloquent complaint in response to extremely fine grained changes in projected spending or tax revenues the chancellor announces policy designed purely to meet these fiscal objectives just replace projected with realised it is still policy instability realised near term outcomes are just as big a driver of volatility as changing future forecasts and muleishly refusing to use the highly convenient device of borrowing cheaply because of some promise your predecessor made 3 4 years ago is a bit crazy i am glad chancellors do not have to perform this way the final bit of the report contains some useful comparisons with more virtuous or fortunate countries i am not sure everyone would agree the german debt brake has been the ideal policy it may explain why they have been such a growth laggard but like they say it is political they add an interesting discussion of using public sector net worth as a target though noting in an ironic aside quite how it moves with interest rates and can therefore be somewhat unstable well quite all in all this is a good short read that encourages people to think about the rules but i think it inadvertently reveals that the volatility uncertainty and asymmetry in the fiscal system is fairly intrinsic and can t be designed away and you can t change what chancellors get fired for even if they have to endure the horror of presenting an account to parliament on what went wrong politicians inherently have near term incentives that outweigh longer term considerations and it takes acts of statesmanship to get beyond it maybe some day in the future one of them will stand up and speak this truth straightforwardly either a left wing think tank accepting that lots of spending needs to be cut or a right wing one setting out how taxes have to rise i actually have more money on the latter it may even be the cps posted by freethinkingeconomist november 24 2025 posted in uncategorized tags economics economy finance news politics leave a comment on what the fiscal rules again is this really a boe whatever it takes moment there is a striking column in the ft from adam tooze the incredibly prolific chartbook author which as i see it boils down to this prolonged stagnation has thrown the uk into a desperate position the 2022 truss faceplant has magnified an already strong tendency to overreact to the bond market past such overreactions like those of 2010 15 led to some terrible policymaking we need to emulate the qe enacting demand boosting heroics of carney draghi et al from a decade ago and affirm the priority of reviving investment led growth somewhat coded it is nevertheless bracing stuff including such sentences as one could follow donald trump in demanding interest rate cuts really he hedges himself with a warning not to ignore inflationary pressures or long run debt the most concrete suggestion is for an immediate end to quantitative tightening qt which he says would help to lift the fear of bond market crisis which is apparently what standing in the way of democratically elected politiciants delivering all that investment there is a fair bit to agree with from tooze and a large proportion of bluesky might swallow the whole package longstanding readers of this blog will know that i have called for the bank to pursue ngdp growth rather than stable inflation for over a decade five years ago i set out what you need to believe if you are to call for this top of the list more important than all the rest is a strong conviction that the economy is demand constrained more cash spending will produce more real output otherwise all you are doing is creating that inflationary pressure that tooze admits we should not ignore anyway is he right well i have questions first i want to protest my demand side bona fides for years i felt strongly that weak nominal growth demand in other words was why the economy was underperforming so what if inflation was on target it was too much of a coincidence that it should have happened all at once i produced slides like this for fellow government insiders and i was particularly exercised by the idea that what may have been a positive labour supply shock was being seen as a negative productivity shock because it just lowered wages i wasn t sure i just thought it was under explored because it was a heresy this is my roundabout way of saying that i think adam tooze is right about the failures of 2011 15 partiularly with regard to the eurozone when trichet raised rates in the face of a weak economy this probably brought about the crisis that draghi had to do whatever it takes to solve but now here is how i see things demand is the problem when ngdp growth is too low and resources are not fully mobilized supply is a problem when a lot of ngdp growth generates inflation and not real returns and here is the chart showing how these have both behaved it compares the post great financial crisis recovery 2010 17 say nominal and real with the one that began in october 2021 up to the most recent moment the blue lines go up at 3 7 and 2 05 respectively the gap between inflation actually the gdp deflator was clearly not the problem i personally think that if we had yanked up the thick blue line the dotted one would have risen too we would have had more real growth now look at the red lines our nominal growth has been far higher since 2021 about 6 per year the dotted one has been much lower about 1 this means most of that nominal growth has been inflationary with significant consequences for inflationary expectations bond yields living standards and more it is not that mysterious why we have enacted a really bad brexit deal suffered a terrible energy price shock that is only half dissipated and the hangover of covid which has enduring labour market effects you can argue about government present and former culpability in some of these but the mode of their effect is clear it is on the supply side they are not causing their effect through insufficient spending to be very clear i am worried about a great many things weak technology diffusion stubborn energy costs low levels of dynamism the need for tax reform crappy regional transport networks but right now unlike from 2010 20 i am not worried that the bank is doing something that is holding down spending and investment in the uk economy my second criticism is about tooze s apparent unconcern about how his suggestions would lift the fear of a bond market crisis what he seems to be calling for is fiscal dominance for growth concerned policymakers to be allowed to assert that investment should be allowed to take place without incurring unduly high interest rates the implication of the call to end qt is that it is central bank selling that is driving down bond prices driving up yields and so the reverse will apply too but friedman wrote about this in 1968 where he argued that monetary policy cannot peg interest rates away from their natural level through putting out extra money doing this raises prices inflation expectations and the equilibrium interest rate the bank needs to be targeting to keep it all under control the result is that inflation and rates end up being higher because of the attempt to make them lower the whole section is brilliant read it the conclusion to take is that it is very dangerous to try to lower future borrowing costs through interference in what the bank is doing i would also argue that if your objective is higher business investment the obsession with interest rates is overdone companies do not chose whether to invest on the back of whether rates are 4 or 5 see my business investment piece the hurdle rate is remarkably invariant high business investment has tended to coincide with higher rates never reason from an interest rate change concluding having come of age economically speaking in the deflationary 2010s i am temperamentally very disinclined to take the supply side view i also ought to bow to a far more qualified economic writer than i am but on the evidence of what nominal gdp has been doing and prices and the rest of the economy this piece in the ft is at best missing the point in calling for some interference with the bank it may deflect politicians from much harder choices than what to do with qt and at worst there is a risk it sends them down the wrong path it goes back to a 2009 pamphlet from centre forum called credit where it s due about qe and now hard to find online the same happened in reverse when trichet et al tried to raise rates above where they should be in 2011 which depressed the economy drove the equilibrium rate down and led to rates being lower than they would have needed to be had they never blundered posted by freethinkingeconomist october 7 2025 october 7 2025 posted in uncategorized tags economy finance inflation interest rates investing leave a comment on is this really a boe whatever it takes moment there really is no getting out of this fiscal corner it is something of a cliche to argue that britain is running out of money living beyond its means wandering through a fiscal fool s paradise but no less true for that the trend of old age payments will make it even worse read the economist it was the great unspoken theme of the last election well unspoken except for every damned think tanker with a spreadsheet who could in half a minute explain that jeremy hunt s departing nics cuts were unaffordable and rachel reeves incoming promise not to raise the major taxes just as unrealistic and things have gotten worse since then i was a bit surprised therefore when mildly calling for some leftish think tank to do proper work on welfare reform to come across quite so many reply people questioning the premise i leave it to experts at the resolution foundation and elsewhere to set out how there is a problem in welfare itself but there are two other popular diversions i keep reading that the problem is the fiscal rules which just need to be changed or abolished and that we can always just tax the rich a bit more the fiscal rules are not perfect and the government over reaction mid year to events framed by those rules is pretty suboptimal but they are also quite irrelevant the government s financial position is objectively bad just make a silly little model with real growth inflation taxes as a share of the economy spending similarly and interest costs and you can easily see how quickly things go from dicey to terrible here i have had a rudimentary go in an easy blair brown world with debt 35 of gdp you can have interest rates of 4 5 5 0 spending rising every year about 2 above inflation and with taxes rising gently from 35 to 37 of gdp over a 10 15 year period debt is going to trend up gently to 45 of gdp a situation easy to bring under control because growth is 2 4 which is enough for everything and you can do lots of good things it is likewise easy to make things work under deflationary coalition era times even with a high starting deficit when your refinancing rate is 2 and nominal growth 3 6 half real half inflation all you need is to trend spending down ever so slightly and things again remain under control debt peaks a few years out debt interest is never the huge burden things get dicier when rates are higher and growth lower which is what the treasury and obr have to concede now here i have lowered real growth from 1 8 to 1 5 and raised the borrowing costs to 4 5 i also include a highly optimistic assumption of spending rising just 0 5 faster than inflation now the only way to get debt to peak somewhere in the knowable future is to raise taxes every year by 0 2 of gdp or 6bn every year in this world in spite of that achievement keeping spending growth low and taxes going up you end up with over 10 of those taxes going on interest and then what if something goes wrong what if interest rates go up 1 growth drops to 1 2 and it turns out the backbenchers can t stomach that kind of spending restraint adding 0 5 a year now it suddenly looks like this in this world the only way to bring things back under control is to have taxes rise by 0 5 of gdp every year a 15bn fight every year i am labouring the point and both the model and figures within are sketchy late afternoon toy quality but the point should be clear when your starting debt is high interest rates rising and growth falling r g is growing wicked fiscal maths is never far away and it does not need the interposition of a rule to bring this to bear it would take ...
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