American here. Do y’all have some kinda binding system of “pre-election commitments” that I don’t know about? Because if you don’t, Reeves’s entire “dilemma” seems to be precipitated on an assumption that violating campaign promises has meaningful consequences for elected officials, which doesn’t seem to be true on either side of the Atlantic.
I think just that it has more political consequences over here, because in a parliamentary system you can't really blame it all on Congressional deadlock. I do think that Reeves will end up concluding that breaking one of the tax pledges is the least worst option.
The tricky bit of course is that our media ecosystem doesn't hold conservatives to account, but it looks to still have a different attitude to the Labour party.
The IRA, (as you might suspect by its name), was passed after inflation was high. It provides longer term subsidies for clean energy investments; it didn't cause an immediate huge "hydraulic" change to govt outlays or private investment. Maybe you are thinking of the ARP, passed when Biden first took office, which had a lot of pandemic relief funds that went into people's pockets, like an expanded child tax credit.
Switching to UK, if govt invests more but doesn't raise taxes, that isn't necessarily inflationary. The govt will issue bonds to fund the spending, and those bonds will mop up income that otherwise would have been spent by consumers or invested by corporates. This will tend to raise interest rates but not necessarily inflation, if the BOE is doing its job.
Side point, as an open economy UK can also fund spending by borrowing more from foreigners, which in turn will mean either buying more imports from overseas or selling few exports. Think of the US in its 19th century growth phase, borrowing tons of money from Brits to build out canals and railroads, and also importing tons of manufactures from the UK. In a global economy, capital is mobile.
Two warp two popular sayings round here, something that can't be done, won't, and there is always the decision-making system of last resort.
Looking a level up, I'm dismayed to notice a rise across the political divide of the ostrich approach to unpalatable decisions. Not that there was ever a golden age of political nettle-grasping. But it's striking to have seen Cameron fail to plan for the Leave vote, then Johnson fail to plan for ... well pretty much anything, and now Starmer and Reeves fail to plan for this budget. Given the years in opposition and the battle-testedness of the manifesto it is upsetting to see the kite-flying for wild revenue-generation schemes this close to the budget.
> And it was also pointed out to me that the precise thing I’m saying is impossible – “a big investment-driven spending program financed by borrowing in an economy close to full employment without inflation or bond yields rising too much” – is pretty much what happened in the USA with the Inflation Reduction Act.
Is this an area where the "exorbitant privilege" of the US dollar might make a material difference? Because the US dollar is a reserve currency (I'm not sure whether it's _the_ reserve currency, as I'm starting to think that the renminbi might be getting there; IIRC Adam Tooze had a chart a few weeks ago showing that the amount of world trade denominated in RMB exceeded that denominated in USD for the first time recently), it's not subject to speculative attack in the same way that sterling is if market traders believe that the government's investment plans will lead to inflation. This is an area where I get confused very easily, so I'd definitely appreciate the advice of wiser heads.
totally possible that the infrastructure spending could lead to inflation through increased wage pressures, as you've said. but if some of the increased costs are due to bottlenecks due to decrepit/lack of infrastructure, then some of the infrastructure spending could be disinflationary (housing, health, transport, energy, childcare). at least, that's my hope!
This kind of feels like a moot point as the government will almost certainly do both. We will likely see a change to the accounting rules that ‘oh-so-helpfully’ eliminates the £20bn black hole, combined with some capital gains tax rises (I’m predicting via removing the NI exception, although given the reaction to the winter fuel allowance they may well keep the pension exception) justified on the back of the supposedly surprising black hole, which will then be put towards the investment they *actually* want to do. The borrowing side will depend on how confident they are in markets, but given the private sector has been practically on its knees, begging the Labour government to invest more, I doubt we’ll see much complaint if they do (provided the investments are sound).
"I don’t know what the appropriate control framework is for that sort of problem, but I don’t think it’s going to look anything at all like the current Inflation Report model."
I think this is important - because on the one hand in certain sectors (construction, hospitality) it's very obvious that post-Brexit, we do have a constrained labour supply - but on the other hand in a lot of other sectors it's very noticeable that wage pressures and recruiting practices don't suggest companies are trying really hard to get people in.
American here. Do y’all have some kinda binding system of “pre-election commitments” that I don’t know about? Because if you don’t, Reeves’s entire “dilemma” seems to be precipitated on an assumption that violating campaign promises has meaningful consequences for elected officials, which doesn’t seem to be true on either side of the Atlantic.
I think just that it has more political consequences over here, because in a parliamentary system you can't really blame it all on Congressional deadlock. I do think that Reeves will end up concluding that breaking one of the tax pledges is the least worst option.
The tricky bit of course is that our media ecosystem doesn't hold conservatives to account, but it looks to still have a different attitude to the Labour party.
The IRA, (as you might suspect by its name), was passed after inflation was high. It provides longer term subsidies for clean energy investments; it didn't cause an immediate huge "hydraulic" change to govt outlays or private investment. Maybe you are thinking of the ARP, passed when Biden first took office, which had a lot of pandemic relief funds that went into people's pockets, like an expanded child tax credit.
Switching to UK, if govt invests more but doesn't raise taxes, that isn't necessarily inflationary. The govt will issue bonds to fund the spending, and those bonds will mop up income that otherwise would have been spent by consumers or invested by corporates. This will tend to raise interest rates but not necessarily inflation, if the BOE is doing its job.
Side point, as an open economy UK can also fund spending by borrowing more from foreigners, which in turn will mean either buying more imports from overseas or selling few exports. Think of the US in its 19th century growth phase, borrowing tons of money from Brits to build out canals and railroads, and also importing tons of manufactures from the UK. In a global economy, capital is mobile.
Two warp two popular sayings round here, something that can't be done, won't, and there is always the decision-making system of last resort.
Looking a level up, I'm dismayed to notice a rise across the political divide of the ostrich approach to unpalatable decisions. Not that there was ever a golden age of political nettle-grasping. But it's striking to have seen Cameron fail to plan for the Leave vote, then Johnson fail to plan for ... well pretty much anything, and now Starmer and Reeves fail to plan for this budget. Given the years in opposition and the battle-testedness of the manifesto it is upsetting to see the kite-flying for wild revenue-generation schemes this close to the budget.
> And it was also pointed out to me that the precise thing I’m saying is impossible – “a big investment-driven spending program financed by borrowing in an economy close to full employment without inflation or bond yields rising too much” – is pretty much what happened in the USA with the Inflation Reduction Act.
Is this an area where the "exorbitant privilege" of the US dollar might make a material difference? Because the US dollar is a reserve currency (I'm not sure whether it's _the_ reserve currency, as I'm starting to think that the renminbi might be getting there; IIRC Adam Tooze had a chart a few weeks ago showing that the amount of world trade denominated in RMB exceeded that denominated in USD for the first time recently), it's not subject to speculative attack in the same way that sterling is if market traders believe that the government's investment plans will lead to inflation. This is an area where I get confused very easily, so I'd definitely appreciate the advice of wiser heads.
totally possible that the infrastructure spending could lead to inflation through increased wage pressures, as you've said. but if some of the increased costs are due to bottlenecks due to decrepit/lack of infrastructure, then some of the infrastructure spending could be disinflationary (housing, health, transport, energy, childcare). at least, that's my hope!
This kind of feels like a moot point as the government will almost certainly do both. We will likely see a change to the accounting rules that ‘oh-so-helpfully’ eliminates the £20bn black hole, combined with some capital gains tax rises (I’m predicting via removing the NI exception, although given the reaction to the winter fuel allowance they may well keep the pension exception) justified on the back of the supposedly surprising black hole, which will then be put towards the investment they *actually* want to do. The borrowing side will depend on how confident they are in markets, but given the private sector has been practically on its knees, begging the Labour government to invest more, I doubt we’ll see much complaint if they do (provided the investments are sound).
"I don’t know what the appropriate control framework is for that sort of problem, but I don’t think it’s going to look anything at all like the current Inflation Report model."
I think this is important - because on the one hand in certain sectors (construction, hospitality) it's very obvious that post-Brexit, we do have a constrained labour supply - but on the other hand in a lot of other sectors it's very noticeable that wage pressures and recruiting practices don't suggest companies are trying really hard to get people in.