The Prime Minister said this on BBC Breakfast yesterday about forward guidance:
"But I think what is good about what Mark Carney is saying is that he is effectively saying look, the Government is doing the right thing by taking difficult decisions to get the deficit down and therefore we can have an aggressive monetary policy until unemployment falls even further."
Now perhaps I have missed something, but I can find no instance where Mark Carney either said or implied that “the Government is doing the right thing by taking difficult decisions to get the deficit down”. All I did see was his strenuous efforts to avoid saying anything about fiscal policy, in line with his previous practice (ignore the headline, just read the quotes).
Was there something in the Inflation Report? You will find on page 22 this
“The IFS estimates that the additional fiscal tightening each year is equivalent to around 1% of nominal GDP on average from 2008/09 to 2017/18, and the pace of consolidation is planned to be broadly similar in 2013/14 to that in 2012/13. Although it is difficult to know what would have happened in its absence, the consolidation is likely to have weighed on output growth over the past three years and will continue to do so.”
Carefully chosen words, but no hint of “the Government is doing the right thing”. Now if the UK was in the same position as the US, with inflation below target, then this ‘weight on output growth’ could well prompt the Governor to say that fiscal policy was making the MPC’s life more difficult. In the UK, however, it appears that it is inflation rather than (maybe?) the (perceived?) inadequacy of monetary policy instruments which is restraining further monetary stimulus.
However, in the February 2013 report you will find an interesting analysis of the impact of government decisions on inflation. In a box on page 36, there is a discussion of the impact of administered and regulated prices (prices either directly or indirectly set as a result of government or regulatory decisions). To quote: “The likely contribution of administered and regulated prices to CPI inflation in 2013 and 2014, at around 1 percentage point, is about ½ percentage point higher than its average between 1997 and 2006.” Over half of this ½ percentage point is due to higher student tuition fees brought in by this government. Not helpful when you are trying to target 2% inflation.
On the basis of this, maybe I could just about get away with claiming that the Bank is ‘effectively’ saying the government’s fiscal decisions are making it more difficult for the MPC to do its job. There is just no way that I could get away with claiming that the Bank, or this Governor, said “the Government is doing the right thing by taking difficult decisions to get the deficit down”.
You may remember that the Prime Minister has form when it comes to putting words into other people’s mouths. Both he and Osborne were fond of claiming that the OBR in some way supported the government’s austerity programme, and that austerity was not harming growth, until it became too much for the OBR to stomach, and Robert Chote wrote the Prime Minister a rebuke (see my before and after posts, and a forecast of mine that was - happily - immediately proved wrong). That episode clearly has not led the Prime Minister to kick the habit, perhaps because he is sure he can get away with it this time. But it says something about the confidence the government has in its policy, when it has to make up the support for it.