My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
Moving the goalposts is a groundsman’s nightmare, but it appears to be all the rage. George Osborne is accused of it, with his £35bn or so grab of the Bank of England’s accumulated interest on the gilts (government bonds) it has bought under its quantitative easing (QE) programme.
Nine days after the Treasury and Bank announced what they said was a financial housekeeping exercise - officials said there was no point building up a pot of savings at the Bank while the country was running a huge overdraft - the debate is still raging.
It may rage for a while yet, at least until we get more clarity when the chancellor unveils his autumn statement on December 5 and the Office for Budget Responsibility delivers its verdict on the public finances.
Three points can, however, be made. If there was confusion about monetary policy before - QE is an untried, “unconventional” tool - there is even more now.
The transfer of the £35 billion from the Bank, where it was doing nothing, to the Treasury where it will be used to reduce public borrowing and debt represents a relaxation of monetary policy. This relaxation was, we can assume, at the Treasury’s behest, raising the question of how independent and how much in control of monetary policy the Bank genuinely is.
Second, the Bank always thought it needed the build-up of interest - so-called gilt coupons - to offset losses later when it has to sell them back into the market.
Now that money is being transferred to the Treasury, the Bank has lost this buffer. The result is likely to be that, while the move will improve the public finances in the short-term, it will leave the taxpayer with a significant bill in later years. It looks like the worst kind of short-termism; an attempt to polish up the public finances this side of the next election.
Third, because these transfers of interest from Bank to Treasury will be ongoing, the government can in effect fund part of the budget deficit for nothing. Whenever the Bank buys gilts under QE, the government’s cost of funding drops to zero. If the idea of a central bank buying its government’s own bonds was murky before, it is positively incestuous now.
Officials insist there is nothing wrong with this exercise — other governments whose central banks are engaged in QE do it — but as I noted last week, it is a bit too convenient when the public finances are under pressure. And, because it is a change of policy, it is a definite moving of the policy goalposts. When Gordon Brown was chancellor, such shifts presaged the collapse of Labour’s fiscal rules. The danger is that history is repeating itself.
PS: Not for the first time, I find myself disagreeing with Sir Mervyn King. In presenting the Bank’s inflation report, the governor made clear his discomfort with the pound’s rise over the past 12 months.
He also said he would like the pound to fall and that “it may be unreasonable to expect anything other than a slow and protracted recovery absent a further fall in the real exchange rate”.
Sterling’s big fall in 2007-8 did not produce the expected export boost but did push up inflation. King’s comments sent the pound down but when that raises inflation I can hear him blaming exogenous factors: not him, guv.
However, Britain’s poor inflation record has much to do with the Bank’s devaluationist tendency. Richard Ramsey, an economist with Ulster Bank, has updated his Britain-Ireland inflation comparison. Since August 2007, the start of the crisis, Britain’s CPI has soared 18.6%, compared with just 0.4% for Ireland. The difference is the huge squeeze on British households. Pushing the pound down more would add to it.