Ben Chu Profile picture
6 Mar, 15 tweets, 5 min read
We’re told that inflation is “Rishi’s nightmare”.

But should it be ours too? #Budget2021

A thread…📈🧵1/
UK inflation is just 0.7%.

But the argument is that it could shoot up fast as the economy reopens – partly because people spend all their lockdown savings at once & partly because of spillovers from the US where Biden is pushing through a 9% of US GDP fiscal stimulus...2/
The Spectator piece suggest this “could crush Britain’s economic recovery and follow the pandemic with a financial crisis”.

And fast rising US and UK government bond yields are cited as evidence that traders are betting on resurgent inflation...3/…
So how worried should we be?

We shouldn’t be complacent of course.

And no one *knows* for certain what will happen to inflation when the economy opens up...4/
Certainly not the @bankofengland.

Its most recent projections have extraordinarily large probability bands, suggesting a one-in-three chance that inflation will be double its 2 per cent target in 2 years, and a similar chance that it will be below zero...5/
But even given this uncertainty there are reasons not to be too worried - or to worry about other things more.

First, expectations.

Recent moves in US and UK bond yields *have* been big but they've only returned to pre-crisis levels and are still close to historic lows...5/
Market inflation expectations, which can be gleaned from comparing the price of inflation-linked bonds to conventional bonds – are consistent with a normal economic recovery rather than a destabilising inflationary surge, even in the highly stimulating US....6/
And the general public’s inflation expectations from surveys – again both in the UK and the US - seem to be pretty stable and well anchored...7/
And a state financing crisis?

Many have pointed to @OBR_UK estimates of the impact of a 1% rise in inflation, bond yields and Bank rate on the state debt interest bill.

This seems to add £25bn to the bill in 2024-25, roughly doubling the current projection for that year...8/
But it’s not obvious it makes sense to simply add all these various estimates together in this manner.

Bond yields picking up could reflect a market sense of a stronger recovery - that would imply stronger future tax revenues to offset the higher interest bill...9/
The real worry for the public finances is less inflation than STAGflation – stagnant GDP and surging prices.

Could that happen?

Well, it did in the 1970s.

But that was an era before independent central banks, which must kill inflationary spirals by raising rates...10/
There’s no strong reason to believe that, if inflation did risk getting out of hand, independent central banks both in the US and the UK would not, again, raise interest rates to contain it....11/
For many economists the more serious hazard at the moment is a disappointing recovery in the wake of the Covid slump, which bakes in permanent “scarring”, harming living standards, productivity growth and investment....12/
From this point of view the danger posed by inflation is that excessively worrying about it risks prompting policymakers at the Treasury and the Bank of England to remove stimulus and support for the economy prematurely...13/
*Fear* of inflation could then do more economic damage than inflation itself.

More here for @indypremium 👇


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More from @BenChu_

4 Mar
*How* exactly is Rishi Sunak bringing austerity back to public services?


A thread…🧵1/
“There's absolutely no way in which anyone can say that's austerity, we're spending more money on public services than we were," Sunak said last November...2/…
But this week a chorus of public finance experts said austerity is indeed returning to the public realm.

So who’s right? And what’s going on?...3/
Read 16 tweets
4 Mar
If an industrial strategy council can't make it to three years, what chance of an industrial strategy lasting any longer?...
Note that the terms of reference document for the Industrial Strategy Council from 2018 refers to maximum six year terms for council members.

This clearly wasn't envisaged as a short-term project…
....Here's the letter from Business Secretary Kwasi Kwarteng to Industrial Strategy Council chair, Andy Haldane, saying the council will end on 1 April 2021 (which some might note is All Fools day)...
Read 4 tweets
4 Mar
Richard Hughes of OBR seemed concerned about the share of GDP projected to be raised by higher corporation tax yesterday:

"Highest level since the Lawson boom in the late 1980s and one seldom sustained for very long in the post-war period"...…
...but this from IFS shows that raising 3% of GDP from corporation tax is by no means out of line with other OECD countries... with looking at the total projected tax rate as a share of GDP (highest sustained level since the 2WW) looking at international context just as important, perhaps more, than UK history
Read 4 tweets
3 Mar
Does #Budget2021 really shows us a “swifter and more sustained economic recovery” for the UK?

A thread…🧵
That was the claim made by @RishiSunak in his Budget speech, citing the @OBR_UK.

Is it justified?

Well, the new OBR projection on unemployment is certainly good news (if it materialises).

A peak of 6.5% would be a very benign outcome, given nightmares of 12% last year....2/ Image
But the GDP projection does not, in fact, look much improved.

The claim of reattaining the 2020 peak “six months earlier”, as this shows, isn’t really much to write home

And the 3 per cent permanent scarring projection from the OBR is unchanged from last time....3/ Image
Read 9 tweets
3 Mar
Sunak says OBR sees "swifter and more sustained recovery than expected in November"

GDP back to peak in mid 2022 – 6 month earlier than previously expected
A 3% of GDP shortfall relative to pre-crisis OBR forecasts in FIVE YEARS' TIME is seriously concerning - does not imply a strong recovery
Read 17 tweets
2 Mar
"Pay for the pandemic" isn't, I'm afraid, a useful way of framing the UK's fiscal sustainability question.

Nor is "raise taxes to pay for the cost of supporting people during the pandemic"...
Furlough and other forms of state support for firms have helped protect the future productive capacity of the UK economy.

Without that support the UK's future structural deficit would have been greater, not smaller...
Way to think about tax implications of the pandemic (and the way people should be encouraged to think about it) is: has the crisis opened up a bigger long term structural deficit by making the economy permanently smaller than it otherwise would have been?...
Read 7 tweets

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