Monetary and Fiscal Policy for 2015 onwards: Seven Years Too Late
Better late than never
It is clear that we have been doing something wrong. I have no doubt what it is: fiscal austerity. “But the debt, the deficit, the debt!” cry the bankers and the Germans. Their fears are misplaced (at least, the Germans’ are. The banks cannot be regarded as impartial).
The Bank of England has been practising QE to ease monetary conditions and in so doing has taken a lot of public debt onto its own balance sheet. It needs to continue to do this, effectively printing money for the government to finance the deficit. Yes, I know, breaking every rule beloved of dear Prudence.
The Government, on the other hand, should be pushing forward fast with major infrastructure projects, principally the development of offshore wind power and the associated industrial capacity to install it. We should be world leaders in this technology (we are already in installed capacity). It should also take on the development of more nuclear power stations, not by making ridiculous unit price promises (tying us in to paying well over the odds for new nuclear electricity) but by commissioning contractors to build them. Put money into nuclear research and developing prototype novel reactors under the management of university physics and nuclear engineering departments – let them teach practical, as well as theory. Not just nuclear research, by the way, but really back our scientific base so that a career in science makes sense. Better rail links – don’t just talk about HS3 for the north, build it now. Home Insulation projects – not the weaselly Green Deal, but a programme of grants focussed particularly on social housing. Talking of social housing, build some. Build a lot. That’s what we should be doing with the money printed by QE.
Now this will, eventually, trigger some inflation and in so doing it will devalue the debt and peoples’ savings. QE has already been devaluing people’s savings, for no apparent benefit other than papering over deep deflationary cracks. In the 20th century, big national debts have only ever been repaid by inflation, which doesn’t really repay them. It will probably be the way today’s debt is repaid, but if we have a truly growing economy (unlike today’s phoney growth) there is a chance that some of the money owed to us – most of the government debt, by the way, is owed to us, we the people, the pensioners, the baby boomers – will be paid for real. And this programme of managed government investment will pay us back.
A good deal of this government investment will generate a return. Offshore wind farms and nuclear power stations can be sold, or kept so we earn from the electricity they sell. Social housing capital can be recycled through Right-to-Buy (need to look at those discounts though, currently far too generous). For others the return will be less direct.
Osborne almost gets it
I have very little time for George Osborne but he does understand that infrastructure spending matters. He didn’t cancel Crossrail, for example. But he didn’t go nearly far enough in boosting infrastructure spending in the recession.
Keep a lid on current spending
Current spending does need to be kept under control. The overall budget does need to be in surplus across the economic cycle but cutting current spending in a recession is completely counterproductive.
This is very important. The ConDems’ actions in increasing tax thresholds are, mostly, to be applauded, but they have been much more expensive than they needed to be. They should have been balanced by an increase in rates. For every penny off average tax rates for those on less than median earnings, a penny more on average rates for those above the median. Increasing allowances without an increase in the basic and or higher rate reduces average rates for everyone. It doesn’t have much effect in making the tax system more progressive. But allied to an increase in tax rates – even the basic rate – it does make it more progressive.
I have clear views on simplifying the tax system and ultimately I think Income Tax should be scrapped, replaced with a CashFlow Tax that wraps up the benefit system as well and provides everyone with a Basic Income. But in the meantime it is important to keep it gently progressive, by which I mean simply that the average tax rate paid should increase for higher incomes.
The German Concern
Germans are terrified of hyperinflation brought on by excessive government spending using paper money; rightly so, since it triggered the economic collapse of the Weimar republic out of which came Hitler. But Weimar would never have been in that state had it not been for the war reparations it had to pay. It was the reparations, not the deficit, that did for Weimar. Now, in the Eurozone as a whole, German reluctance to tolerate monetary expansion is keeping the entire zone barely above the deflation level. Europe needs the same medicine as the UK and the US: monetary and fiscal expansion.
QE was supposed to have provided banks with the liquidity they needed to start lending to small businesses to get the economy growing. However, they really needed it to fix their balance sheets and weren’t about suddenly to start lending to enterprises without customers. Banks aren’t in the business of providing equity capital or of taking entrepreneurial risks in the real economy; it’s not in their DNA.
Banking continues to need reform. Bankers need to be held accountable to politicians, and politicians to the electorate. Nowaday’s its backwards: politicians are firstly accountable to bankers.