Governments won’t be balancing the books any time soon

Ireland and Britain are both looking forward to the fiscal event of the year, the autumn budget. Perhaps "looking forward" is putting it a bit strongly; breath is noticeably unbated. In the UK this will be Rishi Sunak's second formal fiscal set-piece of the year but there has been a more-or-less continuous stream of British mini or micro-budgets since the onset of the pandemic. Similarly, Paschal Donohoe's fiscal changes have occasionally been as frequent as Coalition pronouncements on pubs. At least one has had more coherence than the other.

Given the pandemic-induced frequent fiscal initiatives, we might reasonably ask whether a formal budget isn’t just unnecessary but also beside the point. The inevitability of more changes to spending and taxation being forced upon governments everywhere renders formal planning somewhat moot.

On balance, it’s probably still is a good idea to have a budget. It provides a moment to take stock of changes already announced and to speculate about what more finance ministers will need to do. And to ask whether those needs can be met and at what cost.

Indeed, sparked in part by the forthcoming budgets, that debate has started.

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Interest groups present pre-budget submissions. Unlike finance ministers, these partisans don’t have to make the sums add up, nor do they have to consider the needs of the economy as a whole. Politicians nonetheless do have to appease important constituencies.

A new input into the planning process are the voices who say “money is free”, and its corollary, “borrow as much as you like for as long as you like”. Out of this dog’s breakfast will come the budget.

Minor storm

We’ve recently lived through a minor storm over alleged necessary tax increases. Commentators express fears over borrowing figures that have pushed government debts towards levels seen only in wartime.

In Britain the August silly season saw stories about Sunak’s plans to raise corporation and capital taxes in order “to balance the books”. Donohoe had to state that income taxes will not rise next month. Speculation about impending tax rises has the potential to do real economic harm and needs to be firmly squashed.

Ever since John Maynard Keynes pointed out that governments are not households or individuals, there has been a constant battle between people who know this and those who don't. The income and spending constraints facing the individual are not comparable with those of governments.

Economists understand that this is not intuitive and that many people just don’t get it. Economists have lots of empathy with the recent experience of epidemiologists who have to cope with newspaper columnists who suddenly have previously undiscovered expertise.

Neither Sunak nor Donohoe will be balancing the books any time soon. They don’t have to. For now, borrowing is indeed free. That won’t last for ever, but most economists think it will be a long time before government borrowing costs once again become a problem.

That isn’t quite the fiscal carte blanche that some people suggest. But it is consistent with the idea that we can and should borrow in ways that were previously unthinkable. The problem is that nobody knows what the borrowing limits are, nor are we sure about what constitutes the “optimal” fiscal policy during a pandemic.

One fiscal shibboleth is the idea that future generations will have to pay back our debts. That’s rarely true. Government borrowing is hardly ever paid back, merely rolled over. And we give future generations assets as well as debts. It’s important they inherit a functioning economy.

But just because we can borrow, for now, without limit, it doesn’t mean that we can do so for ever. Our debts may not be paid back but they do have to be serviced.

Not imminent

The fiscal consequences of two “once in a lifetime” crises will play out over many years. Pity the poor finance minister who one day does have to raise taxes and cut spending. That day is not imminent.

Consumer and business confidence is fragile, for obvious reasons. It should not be damaged further by idle fiscal vigilantes. It’s even possible that there is no fiscal crisis waiting out there: rapid economic growth with a bit of inflation, currently not forecast by anybody, could sort out the fiscal arithmetic in surprising ways.

The economic outlook post-pandemic is unknowable. Many commentators are pessimistic, particularly about unemployment. The probable winding-up of furlough-type schemes before the pandemic is over has led to expectations of a global surge in unemployment over the winter, with permanent scarring effects on the labour market and wider economy. Much is made over the risks of keeping “zombie” companies alive. Surely that’s a better bet than letting good businesses die? Fiscal conservatives say that we need to tighten the purse strings soon; government bond yields say otherwise.

For all of the mathematical optimisation tools available to the economists at the Department of Finance, there is, given all of the uncertainty, only one rule of thumb, one modelling heuristic: keep the economy going for as long as you can.

If the economy can be kept in as reasonable shape as possible, for as long as possible, we stand a good chance being pleasantly surprised by the post-pandemic landscape. So don’t switch off the economic life support before you absolutely have to.