Against the fiscal charter

John McDonnell's decision to oppose Osborne's fiscal charter reminds me of what Winston Churchill said of the Americans: they will always do the right thing after they've exhausted all the alternatives.

The charter commits the government to achieving a surplus on public sector net borrowing by the end of 2019-20, which implies a tightening of around four percentage points of GDP. Mr McDonnell is right to oppose this, on three grounds.

1. It is not state-dependent. If economic growth falters, the charter would exacerbate the slowdown by imposing unnecessary austerity. As Simon has said:

Having to achieve a target at a fixed date whatever shocks hit the economy could be harmful when unexpected shocks occur near that date.

You might object that policy-makers still have counter-cyclical tools they could use such as more QE, a helicopter drop or negative interest rates. Such policies, however, have uncertain effects and so it's hard to know what the correct dosage should be. A less tight and more discretionary fiscal policy which allowed interest rates to rise would give us better protection against recession by allowing for fiscal loosening and interest rate cuts if needed - the effects of which are less uncertain.

2. It could be self-defeating. As Richard says, there is still a global savings glut (or investment dearth). This means that someone, somewhere, must borrow. With real interest rates negative - implying massive demand for gilts - this someone should be the government. If it tries to cut borrowing whilst the rest of the world wants to save, the result will be self-defeating: lower GDP and hence lower tax revenues and higher-than-expected government borrowing. This is, of course, no mere possibility. It is just what's happened. In November 2010, the OBR expected PSNB to be £18bn in 2015-16. It now expects it to be £69.5bn, and even this might be too optimistic.

3. Given the inflation target, a tight fiscal policy implies a loose monetary policy. But this policy mix has at least two possible costs. One is that it can generate financial instability as a search for yield encourages banks and investors to take extra risk. As Larry Summers has said:

Low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely.

The second cost is distributional. Loose monetary policy tends to raise asset prices thus enriching asset holders who tend to be already rich. Fiscal austerity, at least in its current form, however, bears hardest upon the worse off. To this extent, the fiscal charter would increase inequality.

Of course, the Westminster Bubble with its deficit fetishism will regard McDonnell's opposition to the charter as bad politics. Maybe. But let's remember that it is good economics.

Comments

[Bob]

Excellent news.

[theOnlySanePersonOnPlanetEarth]

"Maybe. But let's remember that it is good economics."

Well yes, but also remember that when the next survey asks which party is most economically competent the Tories will come out well on top.

So I wouldn't assume people will remember or understand anything.

What you need is good posturing. When David Cameron says he may have to shoot down Russian planes he isn't threatening Putin. Actually Putin will be pissing his pants laughing. What Cameron is doing is assuming the British people are idiots and that he is being really really tough and leader like.

People actually believe that Cameron goes into a room with Putin and if he acts all tough then Putin will get all scared and give into what Cameron wants.

For all Cameron's posturing Putin has gone ahead and done what he wants anyway.

Maybe if we had had Corbyn negotiating with Putin we wouldn't now have Russian warplanes bombing all and sundry.

So much for tough talk Cameron.

But come the next survey, Cameron will easily win the Who is the toughest leader question.

People are fucking thick.

[aragon]

http://www.publications.parliament.uk/pa/cm201011/cmselect/cmeuleg/633/63307.htm

The EU Bill and Parliamentary Sovereignty.

"69. Governments may legislate to place restrictions on their scope for executive action, although the Government itself may well argue that it has no need of the self-imposed restriction, because it would never seek to do what it has seen necessary to proscribe by law."

How did John McDonnell manage to make such a pigs ear of this. Labour should vote against the bill regardless of content as it is just George Osbourne grandstanding.

Unless you accept that it would be politically impossible to oppose or repeal the bill, or you accept the framing of the bill, which of course John McDonnell and many in the Labour party do!

He also seems worried by the charge of "deficit denier".

It is perception over substance, like abstaining from the Welfare Bill. It seems remarkably little has changed.

[aragon]

email from the Labour Party on this topic ends.

"It is crucial that we reduce the deficit, and Labour takes this mission seriously, but it must never be on the backs of the most vulnerable, or at the cost of the key public services we all rely on."

The deficit is meaningless, just an accounting fiction.

You cannot bind a future parliament, repeal can be explicit or implicit, Parliament is sovereign.

The reason we have only have has a surplus eight times in the last sixty years is that budget surpluses with a negative trade balance results in recessions.

Jeremy Warner
http://www.telegraph.co.uk/finance/11930065/Labours-approach-to-the-economy-has-descended-into-an-on-the-hoof-shambles.html

"The broader, macro-economic criticism is that public and private debt are only two halves of the same coin. Push down on one, and, if you expect any growth in the economy at all, it will merely rise up in the other. According to long-term Office for Budget Responsibility forecasts, falling public sector debt is likely to be mirrored by rising household debt.

The Chancellor argues that high public debt both makes the economy vulnerable to shocks and squeezes out spending through debt interest payments. Unfortunately, the same is true of high household and corporate debt. So it is not clear that cutting back on public debt lifts the economy’s capacity to withstand shocks."

https://en.wikipedia.org/wiki/Sectoral_balances

"The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents."

"According to the sectoral balances framework, budget surpluses remove net savings; in a time of high effective demand, this may lead to a private sector reliance on credit to finance consumption patterns. Hence, continual budget deficits are necessary for a growing economy that wants to avoid deflation. Therefore budget surpluses are required only when the economy has excessive aggregate demand, and is in danger of inflation."

1% or greater growth is excessive aggregate
demand? When trend growth is 2-2.5%!

The whole thing is nonsense. And no-one outside the Westminster bubble cares.

[gastro george]

Well they care. But only because they've been told to.

[Bob]

Warner needs to recognise government debt is the non govt sector savings.