We have been in uncertain times for a while now and this has only been exacerbated by the Covid-19 pandemic. One particular area of concern are the public finances of nations who are copying the “Spend! Spend! Spend!” prescription of football pools winner Viv Nicholson. For younger readers the football pools were what people did before lotteries. Indeed if we note the latest IMF Fiscal Monitor there was an issue even before the new era.
Prior to the pandemic, public and private debt were
already high and rising in most countries, reaching
225 percent of GDP in 2019, 30 percentage points
above the level prevailing before the global financial
crisis. Global public debt rose faster over the period,
standing at 83 percent of GDP in 2019.
We get a pretty conventional response for the IMF which has this as a mantra.
And despite access to financing varying sharply across countries, medium- to long-term fiscal strategies were needed virtually everywhere.
There is a counterpoint here which is that the fiscal strategies approved by the IMF have been a disaster. There is of course Greece but in a way Japan is worse. Following IMF advice it began a policy of raising its Consumption Tax to reduce its fiscal deficit. It took five years for it to take the second step as the first in 2014 caused quite a dive in the economy. Then the second step last year saw Japan’s economy contract again, just in time to be on the back foot as the Covid-19 pandemic arrived.
The IMF is expecting to see quite a change this year.
In 2020, global general government debt is estimated to make an unprecedented jump up to almost 100 percent of GDP. The major increase in the primary deficit and the sharp contraction in economic activity of 4.7 percent projected in the latest World Economic Outlook, are the main drivers of this development.
Oh and where have we heard this before? The old this is “temporary” line.
But 2020 is an exceptional year in terms of
debt dynamics, and public debt is expected to stabilize
to about 100 percent of GDP until 2025, benefiting
from negative interest-growth differentials.
I make the point not because I have a crystal ball but because I know I do not. Right now the path to the end of this year looks extremely uncertain with for example France imposing a curfew on Paris and other major cities and Germany hinting at another lockdown. So we have little idea about 2021 let alone 2025.
The IMF is in favour of more spending this time around.
These high levels of public debt are hence not the
most immediate risk. The near-term priority is to
avoid premature withdrawal of fiscal support. Support
should persist, at least into 2021, to sustain the recovery and to limit long-term scarring. Health and education should be given prime consideration everywhere.
I would have more time for its view on wasteful spending and protection of the vulnerable if the places where it has intervened had actually seen much reform and protection.
Fiscally constrained economies should prioritize the
protection of the most vulnerable and eliminate
wasteful spending.
Economic Theory
The IMF view this time around is based on this view of public spending.
The Fiscal Monitor estimates that a 1 percent of
GDP increase in public investment, in advanced
economies and emerging markets, has the potential to push GDP up by 2.7 percent, private investment by
10 percent and, most importantly, to create between
20 and 33 million jobs, directly and indirectly. Investment in health and education and in digital and green
infrastructure can connect people, improve economy wide productivity, and improve resilience to climate
change and future pandemics.
If true we are saved! After all each £ or Euro or $ will become 2.7 of them and them 2.7 times that. But then we spot “has the potential” and it finishes with a sentence that reminds me of the company for carrying on an undertaking of great advantage from the South Sea Bubble. For those unaware of the story it disappeared without trace but with investors money.
For newer readers this whole area has become a minefield for the IMF because it thought the fiscal multiplier for Greece would be 0.5 and got involved in imposing austerity on Greece. It then was forced into a U-Turn putting the multiplier above 1 as it was forced to do by the economic collapse which was by then visible to all.
Institute for Fiscal Studies
It has provided a British spin on these events although the theme is true pretty much everywhere we look.
The COVID-19 pandemic and the public health measures implemented to contain it will lead to a huge spike in government borrowing this year. We forecast the deficit to climb to £350 billion (17% of GDP) in 2020–21, more than six times the level forecast just seven months ago at the March Budget. Around two-thirds of this increase comes from the large packages of tax cuts and spending increases that the government has introduced in response to the pandemic. But underlying economic weakness will add close to £100 billion to the deficit this year – 1.7 times the total forecast for the deficit as of March.
I suggest you take these numbers as a broad brush as it will be a long economic journey to April exemplified by that fact that whilst I am typing this it has been announced that London will rise a tier in the UK Covid-19 restrictions from this weekend. I note they think that £250 billion of this is an active response and £100 billion is passive or a form of automatic stabiliser.
They follow the IMF line but with a kicker that it is understandably nervous about these days.
But, in the medium term, getting the public finances back on track will require decisive action from policymakers. The Chancellor should champion a general recognition that, once the economy has been restored to health, a fiscal tightening will follow.
They are much less optimistic than the IMF about the middle of this decade/
Under our central scenario, and assuming none of the temporary giveaways in 2020–21 are continued, borrowing in 2024–25 is forecast to be over £150 billion as a result of lower tax revenues and higher spending through the welfare system.
They do suggest future austerity.
Once the economy has recovered, policy action will be needed to prevent debt from continuing to rise as a share of national income. Even if the government were comfortable with stabilising debt at 100% of national income – its highest level since 1960 – it would still need a fiscal tightening worth 2.1% of national income, or £43 billion in today’s terms.
Comment
As you can see the mood music from the establishment and think tanks has changed somewhat since the early days of the credit crunch.Austerity was en vogue then but now we see that if at all it is a few years ahead. Let me now switch to the elephant in the room which has oiled this and it was my subject of yesterday, where the fall in bond yields means governments can borrow very cheaply and sometimes be paid to do it. That subject is hitting the newswires this morning.
The German 10-year bond yield declined to the lowest level in five months on Wednesday as coronavirus’s resurgence across the Eurozone strengthened the haven demand for the government debt. ( FXStreet)
It is -0.61% as I type this and even the thirty-year yield is now -0.22%. So all new German borrowing is better than free as it provides a return for taxpayers rather than investors. According to Aman Portugal is beginning to enjoy more of this as well.
According to the IGCP, which manages public debt, at the Bloomberg agency, €654 million were auctioned in bonds with a maturity of 17 October 2028 (about eight years) at an interest rate of -0.085%.
Although for our purposes we need to look at longer-term borrowing so the thirty-year issue at 0.47% is more relevant. But in the circumstances that is amazingly cheap.
In essence this is what is different this time around and it is one arm of government helping another as the enormous pile of bonds purchased by central banks continue to grow. The Bank of England bought another £4.4 billion this week. So we have a window where this matters much less than before. It does not mean we can borrow whatever we like it does mean that old levels of debt to GDP such as 90% ( remember it?) and 100% and even 120% are different now.
In the end the game changer is economic growth which in itself posts something of a warning as pre pandemic we had issues with it. Rather awkward that coincides with the QE era doesn’t it as we mull the way it gives with one hand but takes away with another?
UK National Grid
It was only last week I warned about this.
National Grid warns of short supply of electricity over next few days ( The Guardian)
Good job it has not got especially cold yet.