Editorial

Budget Battle Lines

The next UK budget is on 3^rd March.  We don’t know what position Sunak will take on the hugely increased fiscal deficit.  Will he return to austerity policies quickly or defer for a year?  Certainly the Labour Party response to Sunak’s budget will be an opportunity to clearly separate Labour from the Conservatives.  

There have been two important speeches by Anneliese Dodds on 13^th January and Keith Starmer on 18^th February.  They are important in the sense that they have attempted to clarify the Labour Party economic position.  

In an interview on the Today program on 18^th Feb it was put to Dodds that, what she and Starmer were saying could have been lifted from the 2019 Corbyn manifesto which had led to Labour’s largest loss of seats and therefore why should she expect these ideas to now be welcomed by voters.  Unfortunately Dodds is not able to give an honest answer to such an observation.  She cannot respond that the seats were lost because of Labour’s refusal to accept the Brexit referendum result and not because its economic policies were too left wing.  It is very damaging that Labour ties itself up in a false narrative about the 2019 election.

Dodds’ speech was considerably more detailed than Starmer’s speech which came across more as an attempt to raise his profile in the party and country than as a serious attempt to set out policy.  Dodds had several main points in her analysis.  Perhaps her most important point is that vast fiscal intervention is needed to get capitalist economies out of economic recessions whether these recessions are caused by debt crises as with the Global Financial Crisis (GFC) of 2008 or medical crises as in the current Coronavirus pandemic.  

Fiscal policy deals with government expenditure and taxation.  So fiscal intervention means that the government is changing its expenditure and/or its taxation.  Dodds calls clearly for a huge increase in government spending.  This is to be welcomed.  An alternative to fiscal intervention to bring economies out of recession would be monetary intervention.  Monetary intervention involves governments, via the central bank, keeping interest rates low so that people and businesses will be encouraged to borrow to finance consumption and investment thus increasing demand.  Comparing monetary and fiscal intervention Dodds says: 

“Independent central banks cannot do everything on their own… Over-relying on monetary policy levers for economic growth – as the UK has arguably done for the past decade – can lead to undesirable outcomes….Instead, a truly responsible macroeconomic framework requires independent monetary policy to go hand in hand with a much more strategic use of fiscal policy.”

Dodds’ recognizes that monetary policy has been disastrously ineffective and demands vastly increased fiscal intervention, which is to be welcomed.  Starmer echoes Dodds but in a more general way, talking about the need for a bigger role for the state.  However, the context in which Dodds makes this demand is very questionable and will undermine her ability to defend that demand.  We consider three elements of this context below – independence of the central bank, low interest rates and recommendations from IMF, OECD and IFS.

Independence of the Bank of England

Dodds prefaces her correct call for increased fiscal intervention with a discussion of the role of the Bank of England (BoE) in the economy:

“Central bank independence … is essential for the tough, transparent and coherent macroeconomic policy framework that is necessary for a resilient economy.”

This is a quite false narrative.  The UK central bank, the BoE, is not independent.  HM Treasury is the sole shareholder of the Bank of England following nationalisation in 1946 and retains a public interest control over anything it does.  Gordon Brown’s Bank of England Act 1998 suggested that monetary policy would be determined independently by the bank.  But since the Treasury has complete control of the membership of the Monetary Policy Committee which determines monetary policy that independence is illusionary.  Dodds develops her fiction about the independence of the BoE even further:

“The Bank’s quantitative easing measures – on a scale that has seen asset holdings double in the last year, and its balance sheet set to represent half the stock of the UK’s total outstanding debt – are, clearly, within its mandate, and consistent with the Bank’s symmetrical inflation target. Andrew Bailey, the Governor has made clear that “[a]t no point [did the Bank believe its] job was just to finance whatever debts the government issues”. That clear division in responsibilities must continue. As Chancellor, I would ensure it would.”

It is remarkable that Dodds quotes with apparent approval this quite inaccurate statement by Andrew Bailey.  It is exactly the job of the BoE to finance whatever debts the government issues which have been approved by Parliament.  By law it has to do so.  As Neil Wilson et al make clear in their detailed account of the UK Exchequer:

“Once Parliament has authorised Supply there is no mechanism within the UK monetary system to stop that spending happening. The Bank has no power to refuse and there is no legal mechanism by which a balance has to be checked for available funds. The Bank accommodates the expenditure by balance sheet expansion … Parliament effectively legislates money into existence.”  An Accounting Model of the UK Exchequer, Andrew Berkeley, Richard Tye & Neil Wilson p116.

Low interest rates

Dodds places her call for increased government expenditure in the context of low interest rates.

“For now, financial markets have priced in low rates for the long term. For as long as that is the case, government must make use of benign circumstances to avoid choking off recovery via premature and politically-motivated fiscal tightening….  But it would be an irresponsible economic policymaker who planned on the assumption that low interest rates will continue indefinitely.”

The clear implication of Dodds’ statement is that economic recovery, via fiscal expansion, is dependent on financial markets and low interest rates.  If interest rates were not low then the government would not be able to engage in fiscal expansion and the economy would, no doubt regrettably, remain in recession.

For Dodds, low interest rates are important because she believes the government can only finance its expenditure from revenues raised either in taxation or by borrowing from the private sector.  In effect the economics of the UK government are the same as the economics of a household.

This is an erroneous understanding.  As we saw above, once Parliament has approved government expenditures the BoE simply marks up the accounts of those from whom products and services are being purchased.

The government does also issue bonds via the Debt Management Office broadly equal to the amount by which state expenditure exceeds tax revenues.  This should be seen as a perk to the wealth owning section of the private sector since it allows them to convert non-interest earning cash into interest-earning riskless government bonds.  The BoE will expand its balance sheet to buy any bonds not wanted by the private sector.  They are a tool for managing interbank lending.  It is absolutely not the case that the government is dependent on bond sales to the private sector to finance its expenditures.  

In Starmer’s big speech he shows the same false belief that the borrowing from the private sector is necessary to finance government expenditure when announcing his British Recovery Bond.  

“If I were Prime Minister, I would introduce a new British Recovery Bond.  This could raise billions to invest in local communities, jobs and businesses.  It could help build the infrastructure of the future – investing in science, skills, technology and British manufacturing.  It would also provide security for savers.  And give millions of people a proper stake in Britain’s future.  This is bold, it’s innovative.  And it’s an example of the active, empowering government I believe is needed if we’re to build a more secure economy.”

It’s neither bold nor innovative.  The money to finance government expenditure is legislated into existence by Parliament.  Private sector borrowing is not required, although it might be very popular with those who have savings.  It would give them a riskless asset with a positive rate of interest.  

IMF, OECD, IFS

Dodds and Starmer partly justify their call for fiscal expansion by pointing out that the IMF, OECD, IFS are saying similar things about the need for increased government expenditure.  They should instead have made the point that these institutions have a very poor track record in economic policy recommendations.  Dodds uses their recommendations to suggest that problems about repaying national debt can be deferred for 20-30 years.  Starmer is much more conservative and suggests that problems of national debt can be deferred and resolved in the medium term.

Of course they should have simply said there is no problem with national debt.  Britain is a currency creating state and will finance expenditure with an expansion of the balance sheet of the BoE.

The budget

The budget is on 3^rd March.  It is unclear what position Sunak will take on the national debt.  But it should not matter to Starmer, Dodds and the Labour Party.  

They should present a clear Labour party position that Labour is the party of full employment, that the statistics that matter to a Labour government will be the level of unemployment and the level of inflation and not the size of the fiscal deficit, and that, when the private sector fails to hire all those looking for work,  then Labour in government will provide the funds so that the unemployed can be hired by their local communities to do work which is of value to those local communities in the short term and to train them for more productive employment in the longer term. There is plenty to be done to make this happen and Labour should be pointing out how urgent it is to set plans in motion. At present there is far too little evidence that Labour, at least at the national level, is thinking about this. Labour Affairs has, over the past few months, been giving some indication of how the government’s own money should be spent to eliminate the scourge of unemployment.