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Policy oddity

23 June 2020 By Swaha Pattanaik

Forward planning is good – unless it risks ruining the present. British finance minister Rishi Sunak and Bank of England boss Andrew Bailey are looking ahead to a post-coronavirus world where the economy will be weaned off massive stimulus. There’s a time and place to search for the exit. It’s not here and now.

Bailey said on Monday the BoE should start to reverse asset buying before raising interest rates on a sustained basis. A day before, the Financial Times said Sunak was drawing up plans to include deferred tax rises and cuts to public spending in his autumn budget. It’s odd to be talking about either eventuality until the economy, which contracted by a fifth in April compared with March, is on a firmer footing.

Pump-priming today is typically less effective if people think policy will be tightened tomorrow. For example, households will think twice about splurging if they know taxes will rise next year. And the BoE’s efforts to contain borrowing costs will unravel if investors start looking ahead to a time when it won’t backstop the gilt market.

There’s no harm in Sunak and Bailey showing they are prudent and thinking of the future in broad terms. But to go into such details is premature and unnecessary. Loose policy won’t cause a backlash against UK assets given other countries have taken similar measures. Government debt as a proportion of GDP will rise by around 19 percentage points this year from 2019 on average across 14 advanced economies, Moody’s Investor Service forecasts. Meanwhile, global central banks’ efforts to contain borrowing costs are improving debt affordability. Despite rising debt, Moody’s expects Britain’s interest payments to absorb just over 5% of revenue in 2022, compared with around 8% a decade ago.

Sunak may have ulterior political motives: Such signals make it clear to other government departments that he won’t meet all their spending demands. But even Germany, which is wedded to fiscal discipline, isn’t worrying about this at the moment. The Treasury and the Bank of England got credit for easing policy at the same time in March and April. Brickbats await if they backpedal too soon in tandem.

 

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