A Balancing Act/Slash and Grow/Credit Where It’s Due (link to follow on Monday) are about three things: fiscal policy, where growth might come from (in demand terms), and monetary policy. Wolf ties them up beautifully in a few hundred words.
Balancing Act said that fiscal deficits have to rise in a recession – well duh – amongst other things, and that they are quite effective.
Slash and Grow was sceptical about how far exports could save us. It called for the government to be slightly easier on the government deficit. Investment rising would be nice … though I was not optimistic.
Now M Wolf has neatly tied these ideas together with monetary policy notions:
An obvious way to combine credibility with a pro-growth stimulus is to close the structural current deficit relatively rapidly, while introducing credibly temporary offsets, particularly via spending on investment and tax holidays. The central bank should also finance such temporary deficits. That would eliminate the crowding out of private investment that would occur if governments borrowed in the market, instead. The government would need to co-ordinate closely its structural fiscal consolidation and temporary spending and tax cuts with the Bank of England.
Loose money, relatively tight fiscal – but an explicit coordination of monetary and fiscal policy – which is very much what I call for when describing QE as a combination of the two. My method is more roundabout: identifying a number of credit weaknesses in the economy and directing reserves in those directions. As I said earlier, coming out with tax cuts and spending cuts at the same time is an interesting idea, and now endorsed, it seems, by Mr Wolf:
Delivering a tightening even of 5.2 per cent of GDP over one parliament, without any offset, is likely to push the economy back into a recession. So combine the necessary structural changes to pay, pensions and other long-term spending commitments with credibly temporary offsetting measures, such as lower taxes, incentives for investment and large one-off infrastructure projects.
There is a genesis of a complete plan here. A national infrastructure bank (policy exchange have called for one). Long term revision of benefits. Monetary policy working with fiscal policy rather than the two acting independently ….
I wish I had Wolf’s brevity of expression. But, that said, “The central bank should also finance such temporary deficits. That would eliminate the crowding out of private investment that would occur if governments borrowed in the market” hides a maze of details – about central bank independence, not least. But to my mind there are no massive differences between:
- the central bank financing the government taking expansionary fiscal steps and;
- the government directing the central bank to offer liquidity where there is a fiscal/credit risk.
Or am I missing something? It is late in the week.