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British Chancellor and his Shadow – arm in arm promoting fiscal myths

Summary:
Last week (June 20, 2019), the British Chancellor (for now) gave his – Mansion House dinner speech 2019 – Philip Hammond – at the Lord Mayor’s residence just across the road from the Bank of England in London, which should have conditioned the content of his speech. The guests at Hammond’s evening were mostly male bankers with the usual cohort of politicians. This event is the UK equivalent of the US President’s State of the Union speech except at the British event, both senior economic officials, the Chancellor and the governor of the Bank of England address the audience. The Chancellor’s speech, aimed mostly at the potential PM candidates tried to claim that the if Britain was to exit the EU without a ‘deal’ then the Government would run out of money. He didn’t use those words but

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Last week (June 20, 2019), the British Chancellor (for now) gave his – Mansion House dinner speech 2019 – Philip Hammond – at the Lord Mayor’s residence just across the road from the Bank of England in London, which should have conditioned the content of his speech. The guests at Hammond’s evening were mostly male bankers with the usual cohort of politicians. This event is the UK equivalent of the US President’s State of the Union speech except at the British event, both senior economic officials, the Chancellor and the governor of the Bank of England address the audience. The Chancellor’s speech, aimed mostly at the potential PM candidates tried to claim that the if Britain was to exit the EU without a ‘deal’ then the Government would run out of money. He didn’t use those words but shrouded the message in buzz-terms such as “fiscal space” and “fiscal headroom”, which are among those mainstream macroeconomic terms that mean nothing when coming from a guy like Hammond. Worse, was the response over the weekend by the Shadow Chancellor.

Philip Hammond’s speech came two days after the Conservative contenders for the PM position made all sorts of fiscal pledges (tax cuts and increased spending) during their BBC debate.

The Mansion House speech transcript is not the full record of events given the intervention of Greenpeace activists, which prompted the brutish actions of Conservative MP Mark Field, who physically assaulted a peaceful female climate action protester:

Field is just another buffoon who attended Oxford University.

But the most reported section of the Hammond Speech was this part:

As I said at the Spring Statement, if we leave the EU in a smooth and orderly way, the fiscal headroom I have built up means an incoming Prime Minister will have scope for additional spending or tax cuts.

But there is a caveat: a damaging ‘No Deal’ Brexit would cause short-term disruption to our economy, soaking-up all the fiscal headroom we have built, and more

and while fiscal and monetary policy interventions could help to smooth our path to a post-No Deal Brexit economy, both could only be temporary

and neither could prevent the economy being permanently smaller, than if we leave with a Deal.

So, there is a choice: either we leave with No Deal

or we preserve our future fiscal space – we cannot do both.

And upon making that statement, the Chancellor should have left the room, and handed in his resignation to whoever is relevant (the Queen? Prime Minister – have they still got one?, whatever) and ceased to have public input from thenceforth.

On March 13, 2019, the ridiculously-named British Office for Budget Responsibility published its – Economic and fiscal outlook – March 2019 – which provided the basis for Hammond’s speech at Mansion House.

The outlook was for a downgraded GDP growth forecast and (in their words) “a modest medium-term improvement in the public finances”.

There is no meaning in the concept of an ‘improvement’ or ‘deterioration’ in public finances. That is sound finance language (and framing).

We cannot meaningfully appraise the status of the fiscal situation by looking at whether “tax receipts have performed better than we expected” or whether there has been “downward pressure on debt interest spending from lower market interest rates”.

We can only understand whether the fiscal stance is appropriate by examining whether the material living standards of the people, particularly those at the bottom of the income and wealth distribution that rely heavily on public services are improving.

And, whether the quality and coverage of public infrastructure is improving.

And, whether health and education sectors are delivering high quality outcomes to all.

And, whether the transport systems are operating properly to deliver quality services.

And all the rest of these ‘functional’ outcomes.

We know from various reports and studies that those ‘functional’ outcomes are failing in Britain as a result of the on-going austerity.

The quality of employment has declined.

The quality of public infrastructure has deteriorated.

Local government service capacity is being severely compromised.

The Alston Report on – Poverty in the UK – found that:

14 million people, a fifth of the population, live in poverty. Four million of these are more than 50% below the poverty line … and 1.5 million are destitute, unable to afford basic essentials … For almost one in every two children to be poor in twenty-first century Britain is not just a disgrace, but a social calamity and an economic disaster, all rolled into one.

After receiving hostility from the Government upon the release of his report, the UN Special Rapporteur on extreme poverty and human rights, Philip Alston issued a – Statement – on November 18, 2019, where he said that the “Government has remained determinedly in a state of denial … Ministers insisted to me that all is well and running according to plan”.

As an aside, iNews published a story yesterday (June 23, 2019) – Network Rail bosses told to fly to meetings because trains too expensive, internal policy reveals – which told us that fares have escalated on British rail services so much that air travel is now cheaper within Britain.

Remember back to 2018, when – The Office of Rail and Road – which is the “non-ministerial government department responsible for the economic and safety regulation of Britain’s railways, and the economic monitoring of Highways England” published its report on “Network Rail (NR)’s network licence relating to national timetabling processes” and found that it was “failing to deliver to the greatest extent reasonably practicable … [to] … Run an efficient and effective process, reflecting best practice … (Source).

These are the sorts of ‘functional’ areas that one needs to investigate in order to determine whether national government spending and taxation policy choices are improving or deteriorating.

But the OBR discussion was centred on how fast the British government would “balance the budget” and they defined “fiscal headroom” as the £ gap forecasted between the fiscal outcome and the “structural budget deficit” target “below 2 per cent of GDP in 2020-21”.

OBR claimed, at the time, that this “headroom” had risen to “£26.6 billion (1.2 per cent of GDP)” although they subsequently revised that estimate downwards last week (June 21, 2019) in their statement – Commentary on the public sector finances – May 2019 – as a result of:

… a forthcoming improvement in the accounting treatment of student loans will raise the measured deficit by more than £10 billion a year.

So now this ‘fiscal head room’ is estimated to be £15 billion.

It is one of those terms that become the talk of the media and all the insiders but very little scrutiny is ever attached to whether they have any sensible meaning.

We have the Chancellor making statements about policy at an important historical point for Britain – with Brexit, change of Prime Minister, etc – based on these spurious estimates.

First, we have the spurious ‘structural budget’ estimate – which relies on the statisticians trying to net out cyclical impacts on the fiscal outcome – which means it must define some potential GDP (and full employment) which is flaky at best.

Second, then we have some spurious target for that flaky ‘structural budget’ estimate of 2.2 per cent of GDP by 2020-21 – along the road to the equally spurious benchmark of a balanced fiscal state (zero deficit) by 2025-26.

Third, we then come up with some £ estimate of the difference between the flaky spurious target and the actual fiscal state as representing how much the British government has at its disposal in net terms to spend.

Which then goes into his perverted logic that if Britain was to exit the EU with no deal, which I consider to be the best option, then there is no “fiscal space” left – meaning hell on Earth would befall the British people.

Philip Hammond knows full well that the British government has no intrinsic financial constraint.

Remember on October 8, 2008 when the then British Prime Minister Gordon Brown announced its package to rescue the British banking system, which immediately made available £400 billion to eight British banks and building societies.

I am sure many of the bankers in the dinner hall at Mansion House last week will recall that spending initiative very clearly and many would have personally benefitted from it in the form of higher or protected salaries, continuity of their jobs and more.

And when Gordon Brown made that announcement shares in several banks rose significantly – creating extra wealth for the owners.

The fiscal intervention was lauded as staving off “economic Armageddon” and providing banks with “an unlimited source of liquidity” that “certainly should stop the panic in terms of people wondering whether or not the banks are safe” (Source).

But there was no talk at the time of “fiscal headroom”. The Government did what the currency-issuer can always do – inject as many £s into the system as it thought fit.

No-one was bleating about ‘where is the money coming from’ or ‘how are we going to pay for it’ and all the rest of the tripe that is associated with concepts of ‘fiscal space’ and ‘fiscal headroom’.

Everyone knew where the money was coming from – the currency issuer.

Everone knew how the government was going to pay for it – by putting numbers into bank accounts etc.

No-one at the time was talking about printers going crazy, hyperinflation etc.

All the bankers were delighted that their consequences of their past greed and indiscretions had been attenuated by the currency-capacity of the national Government.

Which should put Philip Hammond’s ‘no-deal Brexit and bust’ claim into clear context.

It is a lie. Pure and Simple.

I support Brexit but have never said it would be a picnic. And, certainly, in the transition phase there is likely to be uncertainty (as we have seen) with negative impacts on firm investment decisions, consumption choices, and trade.

But what is obvious – and evidenced from the way Gordon Brown bailed out the banks in 2008 – the British government has all the fiscal tools and capacity at its immediate disposal to redress most of the negative consequences while the British economy adjusts to being free of the corporatist, neoliberal state that the EU has become.

The fiscal capacity of the British government can always make things better by ensuring what real resources are available are fully utilised.

What that doesn’t mean is:

  • That fiscal policy can overcome the real losses to a nation’s standard of living that are associated with a major fall in its currency when there is a significant dependency on real imported goods and services.
  • That fiscal policy can ensure that debts denominated in foreign-currency (public or private) can be honoured at all times.

A nation with heavy import dependencies (that is, real resource shortages) is also likely to suffer if its exchange rate collapses or world export markets for its goods and services slow appreciably. Fiscal policy can help to attenuate the losses but cannot ‘create food out of thin air’.

However, I do not expect a no-deal Brexit would lead to a currency collapse.

Labour Party – neoliberal own goals

The reason I support Brexit is because I believe it gives the British Labour Party the maximum room to pursue its Manifesto (minus the stupid Fiscal Credibility Rule).

In that sense, while Brexit could be a disaster under the Tories, eventually, if Labour gets its act together and takes power then it will be in a much better position to redefine British policy orthodoxy away from the decades of sound finance which began when Dennis Healey lied to the British people about the Government having to borrow from the IMF because it had run out of money.

The problem is that British Labour seems to still be caught up in its embrace of sound finance.

I thought that once John McDonnell had become free of his former advisor who loves the neoliberal Fiscal Credibility Rule that things might change in his office.

It seems that there is more work to do on that front John!

In his Twitter stream over the weekend you get a very concise summary of the confused position the Left has found itself in this neoliberal period.

We covered that confusion in our book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017).

Examining John McDonnell’s tweet time line, we see on the one hand, a retweet from John McDonnell of Greenpeace Tweet about protesters at the Mansion House event, a retweet about “Global financial bodies not fit for purpose” (IMF, WTO, World Bank), tweets about his speech to the Arise event where he said “we must offer a shining example to the world of what socialism can achieve in practice today”, interspersed with this Tweet:

British Chancellor and his Shadow – arm in arm promoting fiscal myths

There is so much dissonance in these various Tweets and Retweets – the dissonance that exemplifies the modern Left.

On the one hand, it is the only political force that expresses genuine concern for the environment, for workers’ rights, for eliminating the toxic power held by groups such as the World Bank and the IMF.

But, on the other hand, they seem incapable of breaking free from the equally toxic stuff about fiscal ‘headroom’ and running surpluses and the rest of it.

The criticism of the IMF on the same Tweet page as the promotion of sound finance principles (giving primacy to the central bank for counter-stabilisation policies and restricting the fiscal freedom by neoliberal rules) is crazy stuff.

Conclusion

The Left has a lot of work to do to free itself from the neoliberal economics that it privileges.

An Opposition would be well-served by running a continuous public education campaign to reframe the debate and to inject new language and concepts into the public debate instead of constantly privileging the lies.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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