At times we find ourselves observing events that appear to be a major change in themselves but are also part of a longer trend. For example the world-wide trend to lower and indeed negative interest-rates and bond yields. There has been another fashion in recent times which has been the call for more expansionary fiscal policy, often from those who have pushed for more expansionary monetary policy. Let us park for today the promises many of them made about how that monetary policy would succeed and move onto fiscal policy. However of course regular readers may well already be thinking about policies that sit astride the boundary between the two such as Quantitative Easing and policies which operate in both arenas such as helicopter money.
Let me give you an example of this from the Financial Times on the 18th of February.
Seen from Tokyo, the most helpful thing the G7 could do is a co-ordinated fiscal stimulus, but that is improbable given the politics in countries such as the US, UK and Germany.
By the end of May ( the month not Theresa ) then Reuters were telling us this.
Japan Prime Minister Shinzo Abe plans to propose a fiscal stimulus package of as much as 10 trillion yen ($90.7 billion) after warning Group of Seven leaders that the global economy faces significant risk of another crisis, according to the Nikkei newspaper.
If we just stick with Japan this is awkward on two counts. Firstly Japan already runs a considerable annual fiscal deficit so it is an extra fiscal boost which poses the question of why it will work when the existing one does not? Secondly under the original plan for Abenomics the fiscal boost was supposed to work so well that we should now be seeing an improvement. So many places approved of this and even told us it was working.
Japan was not alone as there was some support from the new government in Canada for more fiscal policy. From The Japan Times on the 27th of May.
Prime Minister Shinzo Abe and his Canadian counterpart, Justin Trudeau, have agreed on the need for boosting fiscal stimulus to bolster global growth, a Japanese official said.
This was no great surprise if we consider that Prime Minister Trudeau had relaxed Canadian fiscal policy.
There has been a fiscal boost in Italy
There is another example of a cross-over between fiscal and monetary policy and Itlay exhibits this. From The Walking Debt (h/t @Suanzes ) and apologies for the clumsy translations.
The low shot rates, in fact, have allowed a significant decrease in interest payments that the Bank of Italy, in his last annual report, referring to the three-year period 2013-15 is estimated at about 30 billion euro.
There are some interesting consequences to this.
Last year the net debt, or deficit, it fell by 0.4% of GDP, rising to 2.6. This decrease corresponds exactly to the recorded decline in interest payments, fell from 4.6% of GDP in 2014 to 4.2, while the primary surplus remained stable at 1.6%.
So the recorded austerity was in fact due to Mario Draghi and his policies. Indeed we can go further.
” in a context in which economic activity was still well below potential, fiscal policy had a moderately expansionary effect, “says Bank of Italy.
So there you have it as my financial lexicon for these times comes to the fore. Claimed austerity turns out to have been expansionary if we allow for the much lower sovereign bond yields. Grazie Mario!
It is not only stealth jets that have been sighted in the UK – another entry for my financial lexicon – but there have been sightings of our stealth Chancellor of the Exchequer George Osborne. He too has been hammering out a fiscal policy beat.
George Osborne is planning to slash corporation tax to less than 15 per cent in an effort to woo business deterred from investing in a post- Brexit Britain as part of his new five-point plan to galvanise the economy.
So a fiscal boost via lower taxes is planned and spending is to carry on regardless.
he also called for the next prime minister to continue investing in the HS2 rail project from London to the north and trans-Pennine rail improvements and approve a new third runway for the south-east.
This of course is very different to what he was saying only a few short weeks ago.
Before the referendum Mr Osborne had threatened to make £30bn of tax rises or spending cuts in a post-Brexit emergency Budget;
Up is the new down again.
Whereas now we can not only cut taxes and hint at more spending but also do this.
On the public finances Mr Osborne promised to “maintain the consolidation that we put in place last year”
Time for the band America to stop riding the horse with no name and help us out with this.
You can do magic
You can have anything that you desire
Magic, and you know
You’re the one who can put out the fire
The Fiscal Charter
This was supposed to do this.
a target for a surplus on public sector net borrowing by the end of 2019-20……….a target for a surplus on public sector net borrowing in each subsequent year…..a target for public sector net debt as a percentage of GDP to be falling in each year.
As I pointed out at the time the use of “in normal times” made the whole thing pretty much pointless as we note that according to the original plans we are supposed to be in a fiscal surplus now.
Of course in terms of realpolitik Theresa May had pretty much changed fiscal policy for the Chancellor and since then others have announced fiscal boosts such as the £100 billion plan of Steven Crabb.
Standard and Poors
They have weighed in with a forecast for the UK. From the Financial Times.
The credit rating agency predicts Brexit will cause a 1.2 percentage point drag on economic growth in 2016 and a 1 point hit in 2018. That takes the 2016 growth forecast to 1.5 per cent, and the 2017 forecast to 0.9 per cent.
This is being reported as “barely escape a full-fledged recession” which is interesting as these have been the sort of numbers produced by Italy and Portugal for years and indeed decades now
One needs to be cautious about ratings agency forecasts as of course if they actually had a crystal ball there would have been no credit crunch in 2007/08! But if we get a slow down then fiscal policy will tighten.
The mood music is clear that UK fiscal policy is about to be loosened. As far as we can be sure of anything right now! In terms of the technical issues some of this may appear costless. What I mean by this is that the fall in UK Gilt or sovereign bond yields makes it very cheap to borrow and much cheaper than the 5% expected for now by the Office for Budget Responsibility at the time of the Coalition government’s formation in 2010. The numbers for this are changing all the time but in recent years we have spent between £45 billion and £50 billion per year on debt interest. As we have borrowed more the cost of the debt has dropped offsetting the annual cost.
To put this into numbers the UK has a Gilt which matures in 2018 and pays a coupon ( interest) of 5% per annum. If we issued a replacement it is not inconceivable at all that it might have a coupon of 0% as that is the part of our yield curve that went negative after Governor Carney’s speech on Thursday.
As to the economy then according to the business surveys manufacturing if anything has picked up but construction contracted. As to where we are well the Beatles were on the case.
The Magical Mystery Tour
Is waiting to take you away
Waiting to take you awayRoll up
Roll up for the Mystery Tour
Roll up for the Mystery Tour