George Osborne. Photo by Oli Scarff
Where does the Chancellor now stand, as calls for public spending and ending reliance on monetary policy grow ever louder?
Prompted in part by the OECD’s latest warnings, more and more commentators are now arguing for expansionary policies. They argue that with the monetary policy near exhausted, governments need to step up and spend.
The OECD set matters in motion. In their latest economic report (here; chief economist Catherine Mann’s slides are good), they urged policymakers to take “collective fiscal action” in the wake of slowing global growth and financial fragilities. The case for such action is now “urgent”. “Experience to date suggests that reliance on monetary policy alone has been insufficient to deliver satisfactory growth”. They reject contractionary fiscal policies, and argue instead that low interest rates offer the opportunity to borrow to invest.
Moreover in making this case the OECD deploys the argument that government spending reduces the public debt. As far as I am aware this is the first time we have heard this from any policymaking authority. The statement builds on their June report, when argument was deployed only in the negative:
Hence, such consolidation efforts, rather than achieve the objective of reducing debt-to-GDP ratios tend to increase it, moving the economy further away from the achievement of medium-term sustainability. (p. 244)
This time the statement is in the positive, and is worth citing in full:
A commitment to raising public investment collectively would boost demand while remaining on a fiscally sustainable path. Investment spending has a high-multiplier, while quality infrastructure projects would help to support future growth, making up for the shortfall in investment following the cuts imposed across advanced countries in recent years. These effects would be enhanced by, indeed need to be undertaken in conjunction with, structural reforms that would allow the private sector to benefit from the additional infrastructure; notably in the Europe Union, cross-border regulatory barriers are a significant obstacle. Collective public investment action combined with structural reforms would lead to a stronger GDP gain, thereby reducing the debt-to-GDP ratio in the near term.
Up to now even academics supporting fiscal expansion have been unwilling to go so far; the position stands the whole logic of so-called ‘fiscal consolidation’ on its head. (See however ‘The economic consequence of Mr Osborne‘ from July 2010.)
John Evans the General Secretary of the Trade Union Advisory Committee to the OECD called it straight away:
“The OECD is clearly recognising that increasing public investment is good for short term growth, will support future growth and will improve the sustainability of public finances. The interim outlook’s implicit message is that investment now will reduce (not increase!) public debt ratios,” said Evans at the release.
The full release is here, and is a valuable assessment of the OECD position.
Anthony Hilton in the Evening Standard set out his stall in a piece headed “the government must spend its way to recovery”. He drew on a letter to the FT from earlier in the week by Professor Lord Eatwell, the Cambridge economist, “Response to obvious policy failure is — very much more of the same,” (here). Hilton rejected the reliance on monetary policy as “as now part of the problem rather than part of the solution”, and then reasserted the validity of public spending arguments. But he warned of the policymaker mindset:
Deflation can only be defeated by aggressive government spending to create demand. Unfortunately conventional thinking is now dominated by Right-wing free-market economists and politicians who refuse to acknowledge this and for whom Keynes is the great Satan. And, as long as their view persists, it seems we are condemned to rely on monetary policies which, on their own, seem destined to fail.
The Economist newspaper waded in on Friday, under a curious image of an apparently timid man holding a bazooka marked “Keynes industries inc.” (all is revealed below). Not quite giving up on monetary policy, “the bad news is that central banks will need help from governments”. They examine the case for ‘helicopter money’ (giving households newly created central bank money to spend), a government-mandated incomes policy to generate “across-the-board wage increase”, and finally fiscal policy. The Economist does not go as far as the OECD, but they do argue
Bond markets and rating agencies will look more kindly on the increase in public debt if there are fresh and productive assets on the other side of the balance-sheet.
In terms of specifics: “the case for … a multi-year programme to rebuild and improve tatty public roads and buildings has never been more powerful” (my emphasis).
In its weekend edition, the Financial Times leader column is headed “central banks alone cannot conjure growth”. The FT restate the OECD position (though not the bit about spending paying for itself), and observe “the OECD is right to make the argument”. But for the moment “The situation does not yet demand a more radical collective response”.
Either way, as with Hilton, all the commentary is quite dismissive of policymakers seeing sense. The FT note that G20 Finance Ministers are meeting in Shanghai next weekend, but “there is little prospect of governments heeding this call … those countries most able to increase spending would be least inclined to do so”. [Though if spending pays for itself then all countries are equally able to do so.]
Even David Smith of the Sunday Times, while seemingly still in favour of further consolidation, argues that the government was already failing were they to act contrary to his advice (here):
Sir Nick [MacPherson, Permanent Secretary to HM Treasury] was weaker on the absence of “shovel ready” infrastructure projects which the government could have spent money on. A government determined to spend more on infrastructure should by now have overcome planning and bureaucratic delays.
The Economist’s timid man turns out to be a politician.
Politicians have known all along that they can make a difference, but they are too weak and too quarrelsome to act.
(Their real worry though is political: if “liberal centrist politicians are not up to the jobs” then they will “hand political power to the populists” “with any number of ruinous schemes”.)
I confess to a tiny bit of sympathy for the ‘liberal centrist politicians’. Several years ago the same institutions, commentators and economists were urging governments to make cuts. But the consequent policies have arrested the performance of the world economy and not restored the public finances to health. Actions aimed at avoiding the (contrived) public debt level of 90 per cent of GDP have ended up making 90 per cent of GDP a reality. Take a look at theory vs reality for the UK.
UK government debt as % GDP, Maastricht definition with EU forecast
Few (no?) commentators have felt the need to review whether their advice was sound in the first place.
Nonetheless, politicians implemented the policies and politicians must undo them. We must hope that George Osborne will defy the expectations of his commentator critics. Though his recent rhetoric about “finishing the job” is hardly encouraging.