Wednesday, 5 May 2021

Yawn provoking waffle from the NIESR on fiscal policy.


The UK’s National Institute of Economic and Social Research has just published a very long report on fiscal policy. It’s entitled “Designing a New Fiscal Framework” and it’s around 40,000 words.

If Sir Humphrey Appleby deliberately tried to produce pages of meaningful sounding but essentially meaningless waffle, he couldn’t have done better. The contrast to the simple, clear ideas on fiscal policy advocated by MMT is stark, as I’ll show below.

The NIESR’S basic idea if it can be summarised in a sentence is that existing government committees should do more work in relation to fiscal policy and more committees should be set up: music to the ears of Sir Humphrey. To be exact the NIESR’S main conclusions or suggestions come in the form of five so called “building blocks” which are set out in bold and read as follows (p.20 onwards). If you feel yourself nodding off after the first or second, feel free to skip nos 3,4 and 5.

1 The Chancellor should set out a structured timetable for fiscal events and deliver a Budget speech focused on the state of the economy and on the government’s socioeconomic objectives that is more extensively debated and scrutinised by Parliament and by a fiscal council.

2 The OBR, or a separate fiscal council, should publish pre-fiscal event reports with key issues to which the Budget and the Autumn Statement should respond.

3. Given the uncertainty regarding the economic cycles, the Chancellor should provide more guidance as to how fiscal policy would respond if certain risks materialised and the OBR should produce economic forecasts and scenarios to inform government thinking about fundamental fiscal choices in different states of the world.

4. HM Treasury should create a new body of independent experts for ex ante advice and ex post evaluation of the key fiscal choices.

5. Fiscal strategy has to be joined up across the UK and all its constituent parts, with particular attention paid to distributional effects, productivity, well-being and ecological sustainability.

As distinct from the parts of this report written by NIESR staff and in particular by Jagjit Chadhar director of the NIESR, there are several chapters written by outsiders (e.g. Alistair Darling, former UK finance minister). Those chapters are about specific aspects of fiscal policy, and I am not passing comment on those here: though some of them seem interesting.



In contrast, the basic principles underlying fiscal and monetary policy as advocated by MMT (or at least my interpretation of them) are as follows. But be warned, this actually contains some INTERESTING ideas. You may die of shock if you’re of a Humphrey Appleby disposition.

1. The deficit needs to be whatever keeps employment as high as is possible without causing inflation to exceed the inflation target.

2. The size of the debt / stock of base money that results from deficits does not matter: all that matters, to repeat, is ensuring that unemployment is as low as is consistent with acceptable inflation.

3. As MMTers have explained over and over, a country which issues its own currency has complete control over the rate of interest it pays on its debt.

4. As to whether the deficit should accumulate as zero interest yielding base money or base money which yields interest (e.g. government debt), there is basically no point in paying interest on base money or in having a national debt, as pointed out by Milton Friedman. Thought that’s not to rule out interest rate hikes in  emergencies (as also pointed out by Milton Friedman).

An obvious possible exception to the latter policy of aiming for zero interest on base money and the debt occurs where such debt funds public investments. However, the government debt in the UK is not specifically allocated to funding public investment at the moment, so for the UK (and indeed some other countries) that point is of no relevance at the moment.  

5. One reason for aiming for a zero rate of interest on the debt is that such interest simply rewards money hoarders, with those interest payments being funded by taxpayers in general, including the less well off.

6. There is not much difference between the latter MMT policy and the policy advocated by Simon Wren-Lewis (former Oxford economics prof). The main difference is that he advocates having the rate of interest on the debt hover between zero and just above zero.

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