Key figures at the Bank of England and the Treasury are displaying a disturbing tendency for caution when the recovery from a pandemic demands bold measures. From the murmuring of officials in background briefings to the speeches of prominent policymakers, every pledge “to do whatever it takes” to rescue the economy during the pandemic comes with a clear rider.
Rishi Sunak will sound heroic this week when he tells parliament how Britain’s economy can escape the effects of Covid-19. Money will be pledged – more than the £5bn Boris Johnson mustered in his recent “FDR” speech. Behind the scenes, though, officials are concerned that the UK is weak and must be careful how it spends over the coming years.
Two examples in the past fortnight from the Bank of England stand out. On 22 June, the governor of the central bank, Andrew Bailey, went out of his way to warn that Britain had nearly gone bust back in March, emphasising that as a country we are standing on the edge of a financial precipice whenever disaster strikes.
Speaking on Sky News, he implied that the sheer size of Britain’s debts made it very vulnerable to panics on the international money markets. “The government would have struggled to fund itself in the short run,” he said.
This alarmist reading of the situation, and its likely impact, was designed to make us all feel a little wary about the country accumulating more debt.
The following week saw a speech by the Bank’s chief economist, Andy Haldane. He wanted to make a point about the recovery and how much stronger it appeared to be than the Bank had estimated in May.
What was eyecatching was an exercise illustrating how this faster growth could push up inflation and force the central bank to increase interest rates. He wasn’t saying the Bank would do this, though. He insisted: “I offer it simply as a means of sizing the upside news to the economy since May.”
It could be argued that, as with Bailey’s comments, this was a deliberate attempt to massage our expectations. Don’t move through the gears too quickly or you will overheat the engine. And overheating the engine will force a traditional central bank to throw a bucket of cold water over it.
Haldane mentioned inflation 12 times in his speech, despite Britain having seen precious little inflation for the past 10 years and, like the rest of the developed world, being unlikely to see much of it for the next 10.
This would be understandable if Haldane had been putting the final touches to his application to be an honorary German: in that country an obsession with inflation has ruled the central bank, the finance ministry and the Bundestag for 70 years. Or rather it would be understandable if it wasn’t for the fact that Germany has accepted that the pandemic has knocked the stuffing out of its economy and that inflation is of no concern at all.
The battle is against rising unemployment, business failures and the deflation these will bring. It’s not against the rising prices that are a figment of Haldane’s usually down-to-earth economic calculations.
It’s as if their thinking has changed very little over the past decade and the UK is doomed to repeat the mistakes it made after 2008, or more particularly after 2010, when anti-spending George Osborne took the reins in the Treasury and austerity-supporting Mervyn King dominated the Bank.
Osborne never had a shred of evidence to support his austerity programme as a route to fiscal glory and completed his term without having either eliminated the debt as he promised or engineered a sustainable recovery.
There is no mention of austerity now. There wasn’t in 2008 either. It was a different matter in 2010. That was when King effectively endorsed the coalition government’s austerity programme and could cite the International Monetary Fund and the Paris-based rich nations’ thinktank, the OECD, as keen backers.
The debts are high enough now, boys and girls, they said. Time to start paying them back.
In recent months the message from the IMF, the OECD and every other sensible economist, including the free-market thinktanks, is that government spending will need to lead us out of the pandemic, and that will mean higher debts. The word inflation never passes their lips.
That’s not a green light for the kind of thoughtless, unplanned spending Boris Johnson appears to have in mind. These days the IMF and OECD endorse extra investment and, yes, higher debt, to create a more sustainable future that can cope with the unexpected.