by ‘HarryWestern’, the pen-name of a senior economist working in the private sector who wishes to remain anonymous.
The government’s Autumn fiscal policy statement marks a low point in the UK’s recent history of economic policy making. It is based on false premises, particularly the idea that fiscal tightening is needed to bear down on inflation.
It is not credible, being badly designed and centring on measures that are unlikely to raise significant revenues. It is almost certain to damage long-term economic growth as well as worsening the imminent recession. Finally, it is electorally suicidal – it is hard to imagine a package that could damage the government’s credentials more with key sections of the electorate.
The UK government’s Autumn fiscal policy statement of November 17 marks a low point in the UK’s recent history of economic policy making. The consequences of it are likely to be dire for short-term and long-term economic growth and almost certainly fatal for the political fortunes of the government.
The fiscal package in the Autumn Statement was ostensibly designed to appease financial markets after the fiasco of the September mini-budget put forward by the previous government. But far from being a well-designed package that will shore up the UK economy, it is fundamentally flawed and is likely to unravel badly in the months ahead.
There are three main problem areas – misdiagnosis of the fiscal situation, a lack of credibility of the fiscal measures and damaging consequences of the package for growth.
Mis-diagnosis of the fiscal situation. There is no question that the mini-budget introduced by the Truss government in September went down badly with markets. But it was not the only factor behind the sharp rise in UK bond yields over the few weeks that followed, perhaps not even the main one.
Importantly, UK bond yields also rose due to several other factors:
A global rise in yields,
The Bank of England raising rates more slowly than markets expected and announcing a large programme of bond sales (adding to gilt supply),
The decision by the UK government to enter an open-ended fiscal commitment to cap household and business energy prices,
A scramble for cash by UK pension funds, which had leveraged derivative positions that made them very sensitive to rising gilt yields. This factor greatly exaggerated the rise in gilt yields in a thin market.
Given that all these factors were in the mix, it is unclear that a large fiscal tightening was the right response to the surge in UK bond yields. Indeed, it is not obvious that investors were seriously concerned about the UK’s creditworthiness.
UK credit default swaps (a measure of the cost of insuring against a debt default) did rise from around 20 basis points to 55 basis points, but this was way below the level of 160 seen in the global financial crisis and also lower than in 2016.
Defenders of the decision to tighten policy may point to the marked decline in UK gilt yields that has occurred since mid-October as fiscal policy plans shifted, but this decline is surely due in large part to other factors such as Bank of England intervention in the bond market to cap long-term yields and the halving in European gas futures prices since the mini-budget.
The latter has dramatically reduced the implied fiscal costs of the government’s energy price guarantees – probably by more than the supposed savings generated by the fiscal measures in the Autumn statement.
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