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The Autumn Statement – an exercise in absurdity and public harm

First, the Bank of England seems to have abandoned credibility. Not to be outdone, the fiscal policy makers in government have now joined in the absurdity of mainstream policy thinking by reimposing austerity at the same time as the economy heads into recession. Milton Friedman and his gang used to claim the problem of fiscal policy was that it was practiced in a ‘pro-cyclical’ manner, by which they meant that because of time lags involved in implementation, by the time a stimulus to deal with a recession was in place and impacting, the private economy was already on the upturn – so that fiscal policy was working to push the cycle harder in the same direction. They claimed that was inherent to the use of fiscal policy, which rendered it unsuitable for use as a counter-stabilising (-cyclical) measure. The fact that that claim (which is contestable) won the debate in the 1970s is why all the central bank independence nonsense entered the scene and why New Keynesians claim that monetary policy should be the tool of choice to stabilise spending fluctuations. Now, the Tories in Britain are deliberately using fiscal policy in a pro-cyclical way – pushing the already recessionary forces further into the morass. A totally unnecessary and patently dangerous action. It almost beggars belief that they are getting away with this and the Labour Party essentially just offers to tune up the governments ‘violin strings’ a bit.

This headline appeared in the Melbourne Age newspaper on Friday (November 18, 2022), after the Chancellor had made his announcement .

It tells us how absurd the public debate has become.

“hiking taxes to save” an economy in recession?

The English language loses meaning when you read statements like that.

The Autumn Statement

Last week, the new British Chancellor (I am losing count lately) delivered the – Autumn Statement 2022 (published November 17, 2022) – which outlines the fiscal strategy that replaced the fiscal strategy that replaced the one before that.

The best thing about it was that the print edition was “Printed on paper containing 40% recycled fibre content minimum”.

And even that rather low ratio should tell you how bad the rest of it was.

I won’t analyse the Autumn Statement in detail.

It is a tawdry example of dogma and a catalogue of lies, such as:

1. “A key measure of fiscal sustainability is the trajectory of public debt as a share of GDP”.

2. “Ensuring that debt as a share of GDP falls over time allows the government to fund high quality public services while preserving its ability to support households and businesses in the face of economic shocks.”

3. “Reducing debt as a share of GDP will also help to reduce spending on debt interest, which could otherwise be spent on public services.”

and more.

There is a lot of reference to ‘fiscal sustainability’ but no clear articulation as to what it is other than bringing public debt ratios down via austerity.

But remember, public debt outstanding is just the past fiscal deficits that haven’t been fully taxed away.

And they manifest as the retention of the net financial assets (accumulated) by the non-government sector as a consequence of those deficits.

The British government is proposing in terms of its total managed spending to:

1. Cut public current expenditure by 1.4 per cent in nominal terms between 2022-23 and 2024-25, which translates according to current inflation forecasts to more than a 10 per cent real cut in spending.

2. Cut net capital expenditure significantly from 3.5 per cent of GDP in 2021-22 to 2.2 per cent in 2027-28.

3. Cut the government current fiscal deficit from 4.6 per cent in 2022-23 to 0.3 per cent of GDP in 2025-26.

So while the timing of the spending cuts and tax hikes looks to be decidedly ‘political’ (with an election approaching), the fact is that the Autumn Statement is an austerity document.

Back to that.

George Osborne found out in 2012 after attempting this sort of strategy from May 2010 that it was unsustainable given the damage it inflicted on the economy.

I suspect the same outcome will occur again.

The point is that if the economy is heading into recession, then austerity is counterproductive – this is an example of ill-conceived pro-cyclical policy.

But the real low point for me, was that the on-going purge within the British Labour Party of anything that signals ‘progressive’ has allowed the leadership of the said Party to sound almost as bad as the Tories.

The BBC article (November 19, 2022) – Keir Starmer accepts £55bn ‘black hole’ calculation – tells us how far the non-conservative side of politics has merged with the conservative side as the conservative side fragments in a race to the loony far right.

It is a statement of modern global politics really which gives progressive voices little hope that the fiscal lessons of the GFC, the pandemic and more have been learned by anyone other than those who knew about things before those events.

I have read a lot of British history and I swear we could cut and paste dates and Starmer would sound like Callaghan and Reeves like Healey without the pomp.

The OBR response

Backtracking a bit, the British Office of Budget Responsibility is one of those bodies that neoliberal era has spawned where the organisation gets stacked with New Keynesian macroeconomics who are unqualified to deal with the real world and think DSGE models are reality and pump out terrifying forecasts of astronomic phenomena (black holes) which governments use to depoliticise the public debate so they can inflict austerity (usually) onto the citizenry while ensuring the distributional processes continue to favour the top-end-of-town.

These organisations reek of authority – PhDs all over the place – which the public is unable to challenge because the language used is opaque and sounds technical.

The reality is that these organisations just make stuff up.

They have some computer model which is just a representation of the GIGO principle and it spews out numbers that a pre-programmed to deliver the ideological result that the economists in charge desire – all the time pretending to be scientific and meaningful.

The latest charade is the so-called £55 billion ‘black hole’ or fiscal gap that has dominated the framing of the Autumn Statement and the Oppositions response.

In its recently released – Economic and fiscal outlook – November 2022 – the best thing to be found was that the print edition was “Printed on paper containing 40% recycled fibre content minimum”.

In that document, we get a plethora of analysis that says:

1. The current inflation is transitory and will drop “sharply over the course of next year and is dragged below zero in the middle of the decade by falling energy and food prices before returning to its 2 per cent target in 2027.”

We note that while the Monetarists will claim this as a success of the Bank of England’s interest rate hikes, the drivers of that inflationary episode are not sensitive to interest rate changes and have a life of their own – which will see inflation drop anyway.

Just keep your eye on Japan if you don’t believe me.

2. “The resulting recovery in real incomes, consumption, and investment sees GDP return to growth in 2024 and output recover its pre-pandemic level in the fourth quarter of that year.”

So there is no sustained recession in their outlook.

3. If you believe that analysis, then all the fuss about Britain facing an emergency crisis should wash over you.

But the OBR claims that the “The medium-term fiscal outlook has materially worsened since our March forecast due to a weaker economy, higher interest rates, and higher inflation”.

Points 1 and 2 are about a medium-term recovery, yet point 3 suggests as the economy recovers to a low inflationary, growth path the government’s finances are in peril.

What follows is the usual diatribe on increasing debt, revenue growth falling, spending increasing and all the rest of it which make a mockery of the fiscal rules in place.

A mockery of the mockery nonetheless.

What we have presented is a set of propositions that are uncontested in substance but have large numbers attached to them to make it look as though something bad is happening.

If we examine the basis of the argument then really there is nothing dire at all.

The increasing debt is just a consequence of the unnecessary institutional practice of issuing debt to match the rise in net spending.

It just means that the government is providing an extra portfolio choice to the non-government sector in their wealth management quest.

A risk-free asset to add to their portfolio of risky assets nonetheless.

Judging that against a fiscal rule that “targets to balance the current budget and get underlying debt falling in 2025-26” should just lead the intelligent enquirer to challenge the targets rather than use them as some sort of invariant legitimacy against which we judge outcomes.

Such a fiscal rule, like most that are in place, are destructive at best and demonstrate an arrant failure to understand the purpose of fiscal policy, which is not to achieve some sort of ‘number’ but provide spending support to help the non-government sector achieve its desire spending and saving outcomes, while ensuring the economy is operating at full employment – among other things.

It is highly unlikely that the actual fiscal balance that will coincide with the functional purpose of the policy usage will be a ‘balance’.

It is most likely that an ongoing fiscal deficit of varying magnitudes will be the most appropriate outcome for most nations – Britain definitely.

The OBR estimate that the external deficit will “widen sharply from 2.0 per cent of GDP in 2021 to 5.8 per cent in 2022”. Whether it does or not rise to that level, it will certainly remain in deficit.

Which means any attempt to push the fiscal position back to ‘balance’ would be possible, before recession undermined the quest, if the private domestic sector took on even larger debt positions.

That sector is already over-indebted and on-going fiscal support to income growth is required to provide the capacity to households and firms to reduce these dangerous debt positions.

The point is that calculating ‘fiscal gaps’ against an illegitimate benchmark of balance is a fools exercise.

4. In the short-term, the OBR claims that the British economy “enter a recession lasting just over a year from the third quarter of 2022, with a peak-to- trough fall in output of 2.1 per cent.”

So any reasonable policy response, given that inflation is expected to drop sharply soon, would be to provide some extra fiscal support to the economy to avoid a recession of that magnitude.

The OBR acknowledge that “Without the fiscal support to households and businesses provided by the EPG and other measures announced since March, we estimate that the recession would be 1.1 percentage points deeper, with a peak-to-trough fall in GDP of 3.2 per cent, and the trough in the output gap 0.5 percentage points deeper.”

The question is, if the fiscal support militates again an even deeper trough, then why allow the trough at all?

5. Here we get the OBRs shift to fiction – the standard proposition that fiscal outcomes (and by erroneous implication), government solvency, is “more vulnerable to future shocks or swings in market sentiment” the longer deficits remain.

That is the narrative that has been refined in Britain to the point that all sides of politics believe it to be true.

It is untrue.

Fiscal outcomes are not vulnerable or otherwise – they are what they are.

What is vulnerable to external shocks is the state of the economy – employment, etc – and it is those vulnerabilities that should govern fiscal decisions.

There is absolutely no reason for the British government to allow the economy to enter a recession.

If the OBR forecasts are accurate then that recession will be a policy choice not something that is inevitable.

And the politicians should then be judged harshly for allowing (according OBR forecasts) unemployment to rise by 200,000 in the next 12 month and a further 300,000 in the following year.

As I noted above, the Opposition leadership has accepted the OBR claim that a ‘black hole’ exists in the fiscal position – which just means the estimated fiscal outcome against the illegitimate balance benchmark and claims they will “repair the damage”.

At that point, eyes glaze over and one has pity for the British if that is their choice – Tories or Starmer’s Blairite Resurrection.

The Left in Britain appear obsessed with quibbling about how the ‘black hole’ is calculated rather than dismissing the entire concept, as it should be.

Whether it is £35 billion or £60 billion is irrelevant to anything that is relevant.

The Labour leadership has all but ratified the illegitimate concept by claiming they will use the estimated ‘black hole’ “as a baseline for their policies in any future manifesto and that they accepted that national debt would need to start falling as a proportion of economic output within “a period of time”.

So they want to return to the austerity-lite position where the government deliberately sets about destroying private wealth.

And the only way they can do that is by undermining current public services and/or cutting household disposable incomes.

Starmer actually told the media that the Labour Party “want to be the ‘party of sound finances'”.

The BBC report that Labour will embark on a “£55bn fiscal repair job” if elected.

God help us!

The privileging of ‘fiscal numbers’ over the actual things that matter is neoliberal central.

The Labour Party ceases to be a party of the workers if it buys into that narrative.

The other interesting aspect of the OBR report is that it actually doesn’t detail in any way how the fiscal position can pose a threat which the ‘markets’ will act on.

It is all nod-nod, wink-wink stuff.

The sort of fear that has been drummed into the British that if they step out of line, some amorphous global actors will send their currency to the boondocks.

The reality is that the British pound will not collapse in any fundamental way.

Currencies move up and down all the time and most of us are blithely unaware of the shifts.

Conclusion

Writing from the land of the rising sun, where the government has just announced further fiscal stimulus, the Bank of Japan is refusing to raise interest rates and is continuing its yield curve control policy, and inflation is relatively low, leads me to conclude – poor Britain.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

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    This Post Has 7 Comments
    1. In fact, we are at a time when it’s the government who is not independent of the central bank.
      It went almost unoticed, but I recall a statement by the ECB head (a certain Lagarde), who said, last year, that the real estate tax would have to increase in Portugal.
      And in fact, it did increase for those who pay real estate tax, which are the middle-class.
      That was the monetary authority in the euro zone dictating the government’s fiscal policy.
      As for what drives the neoliberal fairy tales into the mainstream, I believe that we can only blame the media.
      The “snake oil selling” went on, in a crescendo, to nowadays, a time when the media is ushering fake news, while social media is curtailing every comment that doesn’t seem apologetic to the official “truths”,

    2. “But remember, public debt outstanding is just the past fiscal deficits that haven’t been fully taxed away.”

      We have a name and an institution for that in the UK – National Savings.

      The ‘black hole’ is ‘increase in National Savings’.

      The current institutional layout is defined by debt: Debt Management Office, Public Sector Net Borrowing, National Loans Fund, selling debt, etc.

      It’s time to end that frame and refocus on National Savings.

      – Close the DMO, end the primary Gilt market and move all the main institutional accounts to National Savings.
      – That will make all the institutions – Bank of England, Commercial Banks, Pension Funds – hold a positive ‘in credit’ balance at National Savings.
      – The National Insurance Fund, Councils and other public sector operations would hold their investment accounts at National Savings
      – Central government spending increases National Savings
      – Taxation reduces National Savings
      – Financial treasury transactions from the institutions moves balances between these accounts at National Savings
      – The interest rate becomes the savings rate National Savings offers the institutions on their accounts. The debate becomes what the interest rates on the differing institutional accounts should be and what notice period they should have. MMT would say it is zero except for the pension funds.

      It’s clear from the events of the ‘mini-budget’ that the UK Gilt market must be shuttered permanently if we are to make any progress. The bond market can’t dictate terms if it doesn’t exist. Negotiable savings products caused the problem with the pension funds. The solution is to scrap negotiable savings product. If we’re not prepared to force those who hold them to take capital losses caused by interest rate changes, what’s the point of them? What’s the point of forcing capital losses on sovereign bond holders in the first place?

      You don’t need ‘financial collateral’ if everything is held as cash balances at National Savings – ending the farce that is the Gilt repo market and the rentier profits it skims.

      We should develop the National Savings frame to break the language trap of debt and deficit.

    3. Labour’s betrayal of its erstwhile working class base by basically swallowing Thatcherism whole is now complete. As a result, any benefit of Brexit on offer as an escape from the neoliberal embrace of the European Union is lost.

      Now what?

    4. The so-called £50 bn + black hole is just a cover story for the UK ruing class to justify a fiscal squeeze. They surely will know from past experience, even if they are totally unaware of MMT, that the squeeze will fail if judged on its own stated terms. They are determined to create a deep recession with high unemployment etc to make sure workers don’t have the economic power to protect their wage levels.

      The Labour party look like they are fully signed up to this and will happily sit back doing not very much at all. They can look forward to a big win at the next general election as a consequence.

      We’re seeing the Bank of England play its part with a monetary squeeze too. Other central banks are doing the same so we could yet see a recession turn into a global crash and even a global depression.

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