The Bank of England’s chief economist has caused a bit of a stir. Speaking to a Columbia Law School podcast earlier this week, Huw Pill declared that “somehow in the UK, someone needs to accept that they’re worse off and stop trying to maintain their real spending power by bidding up prices, whether through higher wages or passing energy costs on to customers, etc”.
He went on to say that “what we’re facing now is that reluctance to accept that, yes, we’re all worse off and we all have to take our share; to try and pass that cost on to one of our compatriots and saying: ‘We’ll be alright, but they will have to take our share too.’ That pass-the-parcel game that’s going on here, that game is one that’s generating inflation, and that part of inflation can persist.”
The comments have not landed well. The Daily Mail yesterday, 26 April, splashed with “Fury as £190,000-a-year Bank chief tells the rest of us YOU NEED TO ACCEPT YOU ARE POORER!”, while Allister Heath in the Telegraph last night complained that Pill’s comments were indicative of a “buck-passing establishment that has given up”. Even Carol Vorderman, from a rather different perspective, has waded in.
There are certainly grounds for criticism over Pill’s tactless use of language. More importantly, if the purpose of the comments was to help bring down inflation, the remarks are likely to prove futile. In a market economy, workers will try to maximise their income and businesses will try to maximise their profits. Exhortations to be civic-minded is not how one brings down inflation; effective use of monetary policy is the answer. And that is the responsibility of the Bank of England.
At a more profound level, however, Pill has a point. We are poorer than we thought we were and that has real-world consequences.
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The immediate issue is higher energy prices that result from Russia’s invasion of Ukraine. We have suffered a term of trade shock as imports have become much more expensive and, in aggregate, our spending power has fallen.
This is all the more challenging because current issues cannot be seen in isolation. In 2008 we had the global financial crisis which resulted in the sharpest recession since the Great Depression and has depressed productivity ever since. Then came Brexit, with years of uncertainty followed by arrangements that make it harder to trade with our most important market, and tighter labour market conditions that reduce our productive capacity. Covid then exacerbated the labour market problems and left public finances weaker.
The combination of events has left policymakers with three challenges – fiscal sustainability, distributional fairness and restoring economic growth.
I am conscious that many readers would add “austerity” to the list of reasons why we are poorer than we might be. If one thinks that the problem with the economy in the early 2010s was that demand was too low or that spending another £20bn to £30bn a year on capital investment for a few years would have had a transformative effect on our productivity, fair enough, although I am sceptical.
The central argument for fiscal consolidation, which tries to reduce deficits and national debt, was that the level of public spending prior to the crash was determined on the assumption that the good times would continue, with buoyant tax revenues flowing in from bankers’ bonuses, high corporation tax receipts from a very profitable financial services sector, and a booming housing market. Once it was clear that we were no longer in that situation, our tax and spending policies had to adjust to reflect a new reality. If – as appears likely – we are once again poorer than we thought we were, it will again be necessary at some point to ensure that fiscal policy reflects the underlying strength of the economy.
This raises important distributional issues. The government, rather than the Bank of England, is best-placed to address this. Currently it is public spending (and public sector pay in particular) that is taking much of the strain but this looks unsustainable. The rather depressing prospect for both main parties at the general election is that the principal task of government in the next parliament will be to decide how to distribute the pain.
Obviously, politicians will try to evade that question and promise to deliver stronger economic growth which would, it is true to say, help solve these problems. There is little sign, however, of the parties setting out bold proposals that meet the scale of the task. Labour talks about achieving green growth, which is fine as far as it goes but is only directly relevant to a very small part of the economy. In general, we hear little from anyone about major planning reform, developing the Oxford to Cambridge corridor, re-prioritising spending to support science and technology, pro-growth tax reform, making it easier for businesses to bring workers to this country and, perhaps most importantly, reversing the worst effects of Brexit.
To put our plight in perspective, we do not face the prospect of the International Monetary Fund having to intervene, provide a bailout and demand a series of fiscal and supply-side reforms. But to some degree, as a former Treasury official pointed out to me recently, we are going to have to go through a not dissimilar adjustment without external pressure. The grim reality is that we will have to come to terms with the consequences of a weaker than expected economy – even if it is a message that no one wants to hear.
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