The Bank of England’s inflation report is a mine of information about what has and might happen to the UK economy. There are fifty pages on the prospects for demand, supply and inflation. Yet when it comes to fiscal policy, the latest report contains just one paragraph:
“The MPC’s projections are conditioned on the tax and spending plans outlined in the March 2015 Budget, which incorporates continued fiscal consolidation. The Institute for Fiscal Studies estimates that a little over half of the Government’s planned fiscal consolidation, relative to the March 2008 Budget, had taken place by the end of the 2014/15 fiscal year. The remaining consolidation is expected to be achieved primarily through reductions in government consumption.”
The report does not even say the obvious, which is that fiscal policy will therefore act as a significant drag on growth over the next few years. How much of a drag? The OBR estimate that past fiscal consolidation has reduced GDP by around 2%. We could therefore infer from this paragraph that future consolidation will tend to reduce future GDP by a similar amount. But this assumes that the Bank agrees with the OBR’s assessment about the past, and the Bank says nothing on this.
There is a lot more that could be said. If fiscal consolidation comes in the form of cuts to welfare rather than government spending on goods and services, will this make a difference to the demand impact? If, given the promises made during the election campaign, some of this deficit reduction does not take place, how much earlier would we expect interest rates to rise? These are at least as important as the other issues considered at length in the report.
So why the silence on the impact of fiscal policy? I guess it is deemed politically sensitive to talk about such things. But silence is not a neutral position in the current political context. Silence suggests that the demand impact of fiscal policy is somehow unimportant, or perhaps particularly uncertain: both of which the Bank knows are untrue. This is not about monetary policy makers trying to avoid treading on the toes of fiscal policy makers. It is about monetary policy makers supporting a political position which chooses to be economical with the truth about the impact of fiscal policy. The Bank being coy is the Bank colluding with those who are being economical with the truth.