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Speech on the Autumn Statement 29 November 2022

Summary:
My Lords, the Chancellor’s Autumn Statement is designed to reassure the markets of the sustainability of the public finances. That is, the Chancellor accepts as binding the views of the City of London, whether they are right or wrong. It is what the markets think that matters, not how matters really are—a nice intrusion of post-modernist thinking in what is supposed to be the hard science of economic policy-making. It is pretty obvious why the Government should pay such attention to the financial markets. For decades, the financial sector has propped up the UK’s hollowed-out economy. Financial flows into the City of London allowed the country to neglect production and trade and artificially maintain a higher standard of living than its productive capacity warranted. Now we are

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My Lords, the Chancellor’s Autumn Statement is designed to reassure the markets of the sustainability of the public finances. That is, the Chancellor accepts as binding the views of the City of London, whether they are right or wrong. It is what the markets think that matters, not how matters really are—a nice intrusion of post-modernist thinking in what is supposed to be the hard science of economic policy-making.

It is pretty obvious why the Government should pay such attention to the financial markets. For decades, the financial sector has propped up the UK’s hollowed-out economy. Financial flows into the City of London allowed the country to neglect production and trade and artificially maintain a higher standard of living than its productive capacity warranted. Now we are paying the price.

Instead of starting to repair this long-term damage, the Autumn Statement is designed to repair the so-called “black hole” in the budget, in the belief that doing so will, by some magical process, produce an automatic surge in output and growth. In other words, it concentrates on shrinking the numerator, the budget, while ignoring the effects of that shrinkage on the denominator, which is GDP growth. Even in terms of maintaining investor confidence, that is misguided, as the noble Lord, Lord Eatwell, pointed out. How does the Chancellor imagine foreign creditors reacting if his spending cuts produce, or deepen, a recession?

Politics should be based on some theory, at any rate, but there is no explicit theory to be found in either the Autumn Statement or the OBR forecast. The Chancellor sets fiscal targets to reassure the markets. The OBR is there to reassure the markets that the Government’s targets are consistent with its own forecasts. The Treasury and the watchdog cling to each other for mutual protection behind a barrage of statistics that claim far more than they are entitled to.

If there is an implicit model behind both Treasury targets and OBR forecasts, it is the one known as financial crowding-out. There is assumed to be a fixed supply of capital, so the Government’s increased demand for funds puts upward pressure on interest rates. The rise in interest rates will “crowd out” any stimulus afforded by additional borrowing. That is why the less the Government borrow, the more growth you will get. That is simply a restatement of the “Treasury view” of the 1920s, explained by the then Chancellor of the Exchequer, Winston Churchill, who said that

“when the Government borrows in the money market it becomes a new competitor with industry and engrosses to itself resources which would otherwise have been employed by private enterprise, and in the process it raises the rent of money to all who have need of it.”—[Official Report, Commons, 15/4/29; col. 53.]

Presumably, Jeremy Hunt would subscribe to that hoary doctrine, though doubtless in less orotund language. It is as though the Keynesian revolution had never happened; we are just back to pre-Keynesian orthodoxy. It is all embellished in various ways and tweaked here and there, but the substance is exactly the same. However, as the economist Rob Calvert Jump wrote in a recent article:

“There is now a consensus amongst economists that austerity does significant damage to an economy’s potential, undermining growth, as the experience of the last decade in Britain has shown us. Further austerity will do far more damage than a ‘fiscal hole’ that disappears with tweaks to models or accounting rules. The ‘fiscal hole’ is a dangerous fiction compared to the hard facts of austerity’s impact.”

The last point is particularly worth emphasising. How many people realise that the notorious “fiscal black hole” is the product of shifting definitions of net public sector debt?

Theory alone cannot provide us with all the answers; in fact, all the macro models are in more or less of a mess. I will give three examples. The first is the rise in the inactivity rate. There has been a fall of 227,000 in employment since a year ago. So we have a tight labour market with unemployment at 3.6%, a strong demand for labour and a falling labour participation rate. How can that be explained?

Secondly, there is the notorious productivity puzzle. No one has much of a handle on this. What we know is that the forecasts suggest there will be a dramatic fall in living standards, by about 7.1% over the next two years. How will creating a depression stimulate enterprise, innovation or investment, which are the drivers of productivity?

Finally, inflation is expected to peak at 11% in the first quarter and then fall. Again, the discussion really makes no advance on the old discussion about the causes of inflation, whether due to excess demand or cost push—there are, of course, cost-push factors. I think everyone understands that the UK’s support of Ukraine has pushed up energy prices. That is why the Government are now explicitly asking the public to save energy to beat Putin, using crude, World War II-style “Dig for Victory” messaging. What is much less understood is that the UK has a special problem: gas is particularly expensive here, due to our chronic lack of gas storage and our inefficient and exploitative energy distributors.

To conclude, I am strongly in favour of balancing the budget, but not by any mixture of cutting spending and raising taxes. The approach I would favour in present circumstances revives the almost forgotten Keynesian idea of a balanced budget multiplier. A contemporary version of this would suggest a windfall tax or excess profits tax on energy producers, the proceeds of which would be spent by the Government on maintaining investment and consumer demand in the face of the economic downturn.

Robert Skidelsky
Keynesian economist, crossbench peer in the House of Lords, author of Keynes: the Return of the Master and co-author of How Much Is Enough?

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