MNI INTERVIEW: OBR's Bean-UK Can't Bet On Low Interest Costs

-Dangerous To Assume Financing Costs Will Stay Low: Bean 

By David Robinson

     LONDON (MNI) - It would be dangerous for the UK government to set fiscal

policy on the assumption of perpetually low debt costs as there is no guarantee

that borrowing rates will not rise sharply in the future, a senior official at

the Office for Budget Responsibility told MNI in an interview Tuesday.

     "It would be dangerous just to make the assumption that financing costs are

going to stay low for ever more," said Charles Bean, a Budget Responsibility

Committee Member and a former deputy governor of the Bank of England.

     Fiscal risks are asymmetric, Bean said, with large negative shocks far more

likely than big positive ones. "You certainly want governments not to be setting

fiscal policy looking at central scenarios. They should be thinking about the

range of risks."

     Although accepting rates will likely remain low in the near term, he warned

the UK was "taking on a load of debt and this debt is going to be around a long

time."

     "That is why it is quite dangerous for politicians to talk as if there is

no fiscal constraint because financing costs are very low, " he added.

     --DEBT SPIKE

     The current government has championed a fiscal rule based on ceiling for

debt interest costs as a share of revenue but Bean warned of the dangers of

assumptions of an enduring low interest environment.

     On Tuesday, the OBR published three scenarios in its Fiscal sustainability

report which all showed that after an initial Covid 19-related spike the

debt-to-GDP ratio stabilises in the years immediately following 2021-22,

reflecting the improvement in the growth-corrected interest rate.

     But Bean cautioned that the decline in the natural rate of interest, or

r-star, the short-term rate at which monetary policy is neither contractionary

not expansionary, may not necessarily endure.

     While there is "a plethora of explanations" for why the natural rate has

fallen, it is harder to find "stable empirical relationships" on a multi-century

view and that lack of clarity made it " somewhat risky" for the government "to

just assume that financing costs will stay low forever more," he said.

     --BIG SPENDERS

     "Governments like spending and don't like taxing and they like putting off

difficult decisions to the future. So the politics that drives government is

this tendency to use every inch of room they have got against their fiscal

rules," he said, noting that electoral cycles make all politicians "want to be

virtuous but not yet."

     Expanding government debt levels is an appropriate course of action for the

UK as it deals with the consequences of a global pandemic, but a reckoning will

be needed at some point, he said.

     "It would be crazy for the Chancellor to be slamming the brakes on in the

autumn," he said, but added that markets must trust that public finances would

be put back on a sustainable path in the good times.

     "If you do that and the markets are confident that you mean it that gives

you more wriggle room in the short-term," he said.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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