MNI INTERVIEW: Some Help To BOE From UK Budget–OBR's Miles

The UK government’s fiscal package unveiled in its Autumn Statement this week will provide a modest, enduring boost to supply without adding to aggregate demand, helping the Bank of England at the margins, David Miles, former BOE Monetary Policy Committee member and now a top executive at official fiscal forecaster the Office for Budget Responsibility, told MNI.

The Autumn Statement cut payroll taxes and provided a permanent tax break for firms' capital investment without reversing previous revenue-raising measures such as a freeze on tax thresholds.

While the government faced accusations of fiscal pump priming in the run up to an election, Miles said the fiscal arithmetic was little changed compared to the previous OBR five-year projections in March.

NO DEMAND BOOST

"If you just ask the question: ‘how much demand is the fiscal stance pumping into the economy?’, one measure is the size of the deficit, essentially that is how much more is the government spending than it is taking out in tax revenue? ... The answer is, relative to March, virtually no different because the deficit is pretty much the same and borrowing is pretty much the same," Miles said.

Miles said the government had delivered “three measures that do something positive to supply,” namely the cut to National Insurance rates, labour market measures designed to get the economically inactive, particularly the longer-term sick, back into work, and permanent investment allowances for firms. (See MNI INTERVIEW: Some Positives In Cloudy UK Labour Data)

“If you add the three bits together. and one of them is much bigger than the other two, which is the National Insurance (cut) … the whole lot together add something like a third of a percent of GDP five years down the road,” he said.

The OBR anticipates an additional GBP14 billion in investment over five years but with the investment tax break now permanent there will be a continuing boost after that. The BOE is set to carry out a supply side stock-take for its February forecast round.

“It is clearly not the case that this is an Autumn Statement where the measures will add to demand pressure in the economy relative to supply, make the life of the Bank of England more difficult,push up inflation pressures and they’re going to have to offset it with tighter monetary policy,” Miles said. “You’ve got what in the short-term are relatively modest positive supply effects. So I think that, net, if anything, it is kind of helpful.”

PRODUCTIVITY KEY

Miles stressed, however, that the supply and demand effects could be dwarfed by what happens to productivity. In the OBR’s central scenario productivity growth is around 0.9% a year, but it ALSO looked at what would happen if total factor productivity grew by 0.5% or by 1.5%. (See MNI INTERVIEW: UK Productivity Suffering Long-Term Scarring)

“How much difference does that make when we run that through our model to where the stock of debt at the end of our forecast horizon, 2028? And the answer is it worth GBP200 billion either plus or minus … the swing is GBP400 billion, which is about 13, 14% of GDP,” he said.