OECD ignores deficit hawks, backs higher public investment in infrastructure & people

Image from OECD slideshare

Image from OECD slideshare

The Financial Times’ economics editor, Chris Giles, has had a busy few days. He has written several interesting articles, covering the absence of “the deficit” as a big election issue (as a hawk he’s really not happy about that), the OECD’s new forecast for the UK economy, and the marked similarities between the economies of France and the UK.  (More on this last, in a later post). 

Giles also found time to tweet, when asked why he had not referred to the 130 economists’ letter to the Observer (expressing broad support for the Labour Manifesto economic plans), that it was “disregarded because the 130 are not representative of the economics profession.”  This raises some very interesting questions about (a) the profession, and (b) the role of journalists. (Giles claimed in his 'deficit' article that "economists would not be likely to endorse either side".)

But this morning, the OECD’s latest Economic Outlook has been published, which includes individual country forecasts.  It is pretty downbeat about the UK’s near term prospects, and implicitly critical of the Conservative government’s policy plans.  The OECD, let us recall, is generally very orthodox in its policy prescriptions, not a hotbed of economic radicalism!  As per the table at the head of this post, they see real GDP falling to just 1% in 2018 (y/y), on a par with Japan at the foot of the league table

In relation to this OECD report, Chris Giles this morning tweeted

“OECD unkind to Tories - hard Brexit notions will harm Britain's economy, which needs Labour-style public investment.”

At this point, let’s recall what the “disregarded” economists’ letter actually said – it included the following:

The Conservative manifesto calls for continued austerity, which will tend to slow the economy at a crucial juncture, against the backdrop of Brexit negotiations

In contrast, Labour’s manifesto proposals are much better designed to strengthen and develop the economy and ensure that its benefits are more fairly shared and sustainable … We point to the proposed increases in investment in the future of the UK and its people, labour market policies geared to decrease inequality and to protect the lower paid and those in insecure work, and fair and progressive changes in taxation.… [Our emphasis]

And here is what the OECD says:

The economy is projected to slow in 2017 and 2018, owing to uncertainty about the outcome of the Brexit negotiations. This projection assumes that the United Kingdom's external trade will operate on a most favoured nation basis from April 2019… [i.e. there will be no post-Brexit UK trade agreements in place by that time, and WTO rules apply – ed.]

The budget deficit is projected to remain broadly unchanged this year, but fiscal consolidation is planned for 2018 despite a weaker growth outlook. Instead, further fiscal initiatives to increase public investment should be considered to support demand in the near term and boost supply in the longer term...

Moreover, reduced debt service costs due to very low interest rates, the transfer of interest payments collected by the Bank of England under its quantitative easing programme and the longest maturity of public debt in the OECD (above 15 years) create substantial fiscal space. Fiscal policy should therefore be used to offset growth headwinds created by uncertainties surrounding the future withdrawal of the United Kingdom from the European Union.

The UK economy has been increasingly exposed to international trade and competition. This raises productivity and incomes, but also has downsides as sectors adjust and workers are displaced. Dealing with these downsides requires stronger policies to ease adjustment. Higher investment in transport infrastructure, in particular in less productive regions, would improve connectivity and the diffusion of knowledge.. Supporting higher educational attainment and addressing teacher shortages in less productive regions would raise skill levels of younger people, increasing their adaptability and their chances of finding and holding good jobs. [Our emphasis]

In other words, the policies supported by the OECD, in the context of Brexit, are in essence the same as those which the 130 economists have backed in their letter to the Observer – and whom Mr Giles deems should be “disregarded”.  (The OECD clearly rejects the very points that Chris Giles and the IFS's director Paul Johnson have been making - quite mistakenly in PRIME's view - to the effect that we should indeed be worrying now about not having enough "fiscal space".)

If the 130 are indeed to be dismissed (and therefore unmentioned) by the FT's senior journalists on the grounds that they are “not representative of the economics profession” on these issues, then it is clear that either the mainstream of the economics profession still has a very big problem which it fails to address, or the FT has gone badly wrong in this instance - or both.