This is a new product. It’s a tour de force, ranging from obscure line items on government finances, to some philosophising about the nature of uncertainty.
But it is not beyond criticism. This post pulls together tweets I sent last night [Sat 11 July].
First, I was hoping to read something explaining how indefinitely low equilibrium real interest rates, and therefore central bank rates, would translate into greater fiscal risk for a given recession risk, on account of there being a greater call on fiscal stimulus – automatic, or discretionary, or both – at the zero bound. This extra fiscal risk comes about on account of monetary policy being more constrained than it was during the past recessionary episodes that the OBR’sreport discussed.
Even if you thought that quantitative easing was a perfect substitute for interest rate policy – a position that would be rather extreme – this itself would translate extra risks in the balance sheet of the consolidated government/Bank of England, as assets were bought and sold in the busts and booms.
Second, it is curious that the risks relating to our current >8 year spell at the zero bound are not spelled out. It may be that the UK economy cruises back to a resting point for interest rates at say 2%, permitting a slow further consolidation of fiscal policy. Or it may not. It may instead prove to be the case that we are trapped indefinitely at the zero bound for the need of a very large fiscal stimulus to achieve lift off.
The silence on this risk mirrors the need that the Bank of England itself feels not to comment directly on current fiscal policy. The BoE’s silence is more understandable. But despite the existence of 2 independent bodies commenting on or implementing macro policy, there seems to be a missing mandate or preparedness to point to the major macro-fiscal risk of the day.
There is some interesting text about the Treasury’s risk management structures. We are told of the existence of a dedicated ‘Fiscal Risks Group’ which writes reports regularly to the ‘Executive Management Board’, from which advice emerges. We are told of activities like ‘horizon scanning’. Well, we are clearly in safe hands then! An analogy is writing a report in 2007 that observes with approval that the Bank of England writes a ‘Financial Stability Report’ and expecting us to draw comfort from this. Merely alerting us to the existence of committees and meetings and reports cannot be at all reassuring. Such things may not amount to a hill of beans in the face of a choppy world economy and a struggling polity. Writing about them so uncritically, the OBR’s report dilutes its normally severe and disapproving tone of independence.
A curious thing about the report is that it does not draw out that in many ways the whole point of government is to assume risk, not to avoid it. Many government policies fill in for missing, or poorly or inequitably functioning markets for risk [unemployment insurance, health insurance, pensions]. Government is the means by which many of the risks we face are pooled. Since it has the deepest pockets of all, the largest risks naturally lie with it. Its power to borrow allows us to spread risks across cohorts through time. A government balance sheet which was managed to continually avoid risk would be one that was wasted. Of course, the capacity of the government to absorb risk is limited and so attention must be devoted to ensuring that scarce fiscal space is used for the most worthy causes. But nevertheless it must be used.
Finally, the Report seems to abstract from risks emanating from government policy itself. Recent UK history has been characterised by the repeated adoption, fudging and then dumping of fiscal rules. This itself has probably impaired the credibility of policy and the capacity of the government to bear risk. And that this behaviour may be repeated is itself a source of risk to the trajectory of fiscal balances going forward. The practice of the OBR – just like the BoE – of conditioning its analysis taking stated policy as a given precludes commenting on this problem, ultimately reducing the chance that the problem is ever fixed.