Spending watchdog sees warning lights flashing
Sir Charlie Bean’s time in Threadneedle Street gives him rare insight into Britain’s economy
Sir Charlie Bean, board member at the Office for Budget Responsibility and former deputy governor of the Bank of England, is a rare creature among economists in public life. At 67, with a stellar career behind him and still playing a key role as arbiter of what the government can afford at its spending watchdog, he’s not afraid to speak frankly.
“With my OBR hat on, I am not allowed to say anything about the appropriate fiscal course of action,” he says when I ask which taxes Rishi Sunak should raise. “We crank the numbers, we don’t say what the chancellor should do.” But, of course, he does have an opinion, which he is happy to share.
“If you have to raise taxes, it makes more sense to raise them on things that are bad, which is the argument for sin taxes,” he says. “A tax on things that create global warming produces better economic outcomes as well as raising revenue. So one can certainly see the attractions of doing that.” It’s pretty clear that a carbon tax would be on Sir Charlie’s list of proposals to the Treasury if he was allowed to submit one.
We are talking taxes because the OBR forecasts at last month’s spending review left the chancellor little option. Its outlook was full of superlatives, just the wrong kind: the deepest recession since 1709, a contraction of 11.3 per cent; record peacetime borrowing of £394 billion; the highest level of national debt in 60 years at over 100 per cent of GDP.
Sir Charlie is in no doubt that “it was the right thing to do to let borrowing take up the slack” this year. The difficult bit is what comes next. “The financial crisis and now the coronavirus crisis are like wars in the sense that they are both justifications for temporarily higher deficits,” he says. “But it will obviously make sense once the crisis [has] passed to get back to normal settings to build up space for the next shock. Given we’ve had two bad shocks in the space of a little over ten years, I don’t think one should count on there not being further ones.”
Again he veers towards giving the chancellor advice. “One shouldn’t be content with simply stabilising debt-to-GDP,” he says. “If that was all you did during peacetime, when you have a succession of bad shocks the debt-to-GDP ratio just keeps on ratcheting up. So it does seem sensible to have a more ambitious target of gradually bringing it down.”
It is this observation that brings us on to tax because, as the chancellor said at his spending review, “underlying debt is forecast to continue rising every year” of this parliament, which he described as “clearly unsustainable”. Recent experience has been exactly what Sir Charlie fears. Since the financial crisis hit in 2008, debt has ratcheted up every year bar three, rising from 34 per cent to 85 per cent of GDP last year despite austerity, before leaping once more to 105 per cent, near levels for which Treasury officials would once reprove Italy.
The OBR’s forecasts suggest taxes will need to rise by roughly £30 billion just to stabilise the debt even after the £10 billion of spending cuts Mr Sunak unveiled last month that push the government up against the limits of its promise to “end austerity”. Sir Charlie’s recommendation suggests that £30 billion won’t be enough.
For him, the question is not whether debt should be falling but how fast to bring it down. That “depends upon your assessment of the likelihood of future shocks and things like the level of interest rates relative to growth”.
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ight now, rates are low but that does not give Sir Charlie comfort. Inflation is a real risk, he says, only manageable if it is driven by an upward shift in the underlying growth rate. But “that’s the holy grail” of better productivity, which has eluded Britain for a decade. More likely is a spike in inflation during a cyclical rebound from the crisis, in which case the Bank of England would have to raise rates.
“Policy is highly stimulative at the moment,” he says warily, in reference to the £450 billion of quantitative easing this year and government spending spree planned for next year. A 1 per cent rise in both interest rates and the cost of government borrowing would add £17 billion to debt servicing. Inflation of 3 per cent would add another £6 billion. Paying for that small increase in debt servicing would mean 4p on income tax.
Sir Charlie expects the Bank, where he spent 14 years as chief economist and deputy governor, to keep rates low next year to drive the recovery but he supports proposals to start selling off the £875 billion QE portfolio soon. This year’s £450 billion of QE was “much more of a financial stability operation” than “conventional monetary policy to boost aggregate demand”. The Bank was acting as “market maker of last resort”, not trying to get people spending. “You’d be crazy to try to get more people to go to shops when the consequence is you get more infections,” he says.
As such, the intervention was similar to the £10 billion of corporate bond purchases done alongside QE in 2009. “As soon as the market came back, we sold those off,” he recalls. “That helps to realise that it would make sense to start unwinding QE before Bank rate got back up.” The unwind could begin next year if the economy recovers quickly, he says.
He is “not a huge fan of negative rates”. They hammer bank profit margins, which “can be counterproductive both in reducing the supply of credit and producing financial stability risks”. He would take a different approach; to impose negative rates not on deposits, as is the conventional understanding, but on “the rate at which the Bank lends” to high street banks. Or to put it another way, “paying the lender to borrow . . . effectively providing a public subsidy [to commercial banks]”.
“There is nothing to stop the central bank from saying we’ll pay you 5 per cent a year to take this money from us provided you lend it out,” he says. As a subsidy, however, it would require Treasury approval.
One thing is certain. He does not want to go through another forecasting round like the last, with staff holed up at home during the second lockdown, interrogating Treasury officials over Zoom. “I’m not sure whether we could expect the staff to go quite as far next time. I think some would be pretty close to breaking point.”
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