Jeremy Hunt’s Autumn Statement has given us big tax rises and spending cuts to avoid the huge “fiscal gap” created by the need to meet the debt-to-GDP ratio falling by 2027-28 – the new “fiscal law” money”. But it will increase the inflation rate and ironically will also damage the public finances.
Government borrowing is an important policy tool, which allows the government to do two useful things: first, to stabilize the tax rate at a level that is good for long-term growth, and second to allow for changes in the balance of payments to slow down the business process. And the government must adjust its books for a long time, as we have been doing for the past two centuries. But the word “long time” is very important. They mean that, looking forward, government debt will always be reliable.
In practice, we can test this by imagining a long time, usually 10 years ahead at least, to find that the debt/GDP ratio decreases to a level like 50 percent while it is -no problem of support. Now turn to Thursday’s statement to see how the Government got into this mess. Why was 2027-28 chosen as the year when the debt ceiling will fall?
This option is strong and powerful. Very powerful because it prevents the changes necessary for the two functions identified above. It is charged with the necessary tax rates to support growth, especially corporate taxes. Also a bad coming in the face of recession, which the Government should reduce, will be contrary to this pro-cyclical fiscal policy tightening. Therefore, this statement will make the destruction worse and destroy the growth.
But this date option is also weak because it does not make us confident about long-term debt sustainability. In fact, because growth will suffer, the UK’s long-term debt/GDP ratio will worsen. According to our Cardiff model, which is based on UK data and is more pessimistic than the Office of Budget Responsibility about the impact of tax increases, growth will be reduced to zero. Then, if anything like the current spending plan is kept, the debt/GDP ratio will rise to dangerous levels.
Such assessments reveal the importance of growth not only for citizens’ living standards but also for the financial health of our government.
However the OBR has done its maths with an alternative tax policy that doesn’t hurt growth, so according to our Cardiff model, growth will return to 2 per cent a year for 30 years until the pandemic. Then the OBR will note that the debt/GDP ratio will fall steadily over the next decade.
Therefore, this is arbitrary about the money of the government means that the statement broke not only in the economy, but also in the long term financial society. This is the main flaw in his whole approach.
There is also an error in the OBR’s calculations which increases the uncertainty of its debt forecast. This relates to the cost of the Bank of England’s quantitative easing (QE) program in which the bank bought government bonds and other marketable assets by printing money in the form of securities.
Treasury/OBR accounts treat bank deposits as liabilities, with interest paid at bank rate. But this is pure nonsense; Bank securities can only be exchanged for cash, which has a security value that does not pay interest. The bank does not need to pay interest on bank securities to control the cost of credit. He has a toolbox he can deploy to figure this out, including setting up ratios and lending directly to the market.
This banking practice did not cost the state much when banking reserves were low – as was the case before the financial crisis and Covid, or when interest rates were close to zero. But current savings are huge after all that QE, at £950 billion; at 3 percent interest, the cost of interest is now almost £30 billion per year.
This is an unnecessary addition to the government bill. It’s like paying a commercial bank a windfall subsidy that is subject to short-term interest, without justification. Ignoring the sale of bank debt, this error raises the OBR debt/GDP ratio to almost 10 per cent of GDP by 2027, and the OBR “budget gap” in 2027-28 by £50 billion .
Finally, we come to the proposed strategy for Austerity 2.0: to strengthen the market on two counts: that we do not have a balanced risk and that UK prices are under strict control strength. Both are misunderstood.
Our credit default rate has remained moderate even to a level of hysteria over Liz Truss’s previous proposal. As for the current prices, it is largely due to the collapse of the supply chain that the commodity prices are changing slowly, as the supply constraints are being reduced. The US currency has now passed its rate and ours is close to it; The bond market’s fear of inflation is greatly reduced, so it will not threaten the statement that supported the economy instead of eliminating it like this.
The main driver of inflation – the printing of large amounts of money in the Covid era – has not changed so far but is instead being translated into excess income, with annual income growth approaching zero across the US, EU and UK. . Inflation forecasts for 2023 are around 5 percent in most developed economies. The Chancellor’s position will make no difference to commodity prices. But they will make wage growth worse by reducing people’s take-home pay. Also, they increase digestion in the long run by reducing growth.
In short, the Autumn Statement is a wrecking ball – worsening debt, undermining growth, lowering long-term public finances and even raising the public health bill. Common reforms are needed to bring back the spirit to these plans.
Patrick Minford is professor of applied economics at Cardiff University and fellow of the Center for Brexit Policy