The key chart
The key message
The Office of Budget Responsibility (OBR) will publish its latest forecasts for the UK economy and public finances tomorrow (25 November 2020) alongside the Chancellor’s Spending Review.
In normal times, the focus would be on assessing progress against fiscal targets. A more interesting focus in the current “extraordinary times”, however, would be to assess policy and the accompanying rhetoric in the context of unprecedented shifts in UK financial sector balances and the on-going debate between orthodox fiscal thinking and Modern Monetary Theory (MMT) recommendations.
Despite the dramatic shift in the private sector’s net lending position this year, UK policy debate remains centred on “sacred duties to balance the books”, rumours of public sector pay freezes and speculation about tax rises. From the position of “orthodox fiscal thinking”, no surprises here.
MMT, which at its core is simply a description of financial flows in a modern capitalist economy with private banks and a government (Keen) provides an alternative view, however. Economists such as Stephanie Kelton argue that (as currency issuers) neither the UK nor US governments are dependent on tax revenues or borrowing to fund spending (the most important constraint on government spending being inflation instead). For Kelton, “the problem is that policy makers are looking at the picture with one eye shut.”
The Bank of England does not agree, clearly! At yesterday’s (23 November 2020) Treasury Committee hearings, Professor Silvana Tenreyro (an External Member of the MPC) dismissed MMT be repeating the adage that “the good things are not new and the new things are not good,” and Andy Haldane (Chief Economist) argued that his problem with MMT was that it is not modern, not monetary and not really theory, merely “a trick that can only be pulled once” instead.
In this context, the packaging and analysis of tomorrow’s UK announcements (and on-going US policy debates) will provide an interesting indicator of the balance of economic debate and the extent to which MMT is influencing policy choices on either side of the Atlantic, if at all…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.