One of Scott Sumner’s assertions is that government doesn’t really have control over the overall expansionary or contractionary stance of economic policy. This is, at the very least, shared with the independent central bank. Or, in Sumner’s insistence, it entirely offset by the decisions of that central bank.
One proof of this might be the Truss/Kwarteng adventure where the low tax dash for growth was indeed derailed by the Bank of England (well, according to some tellings of that story at least).
Another and more detailed proof could be this from Paul Johnson at the IFS:
Tax cuts would put ‘scary’ UK finances in greater danger, warns top economist
That’s not quite what is said, that’s the headline writers. Rather:
Rishi Sunak and his chancellor Jeremy Hunt remain under intense pressure from their own MPs to cut taxes in March, in the run-up to the next election. While the prime minister has been clear that cutting inflation is his only economic priority for now, officials have privately hinted he is interested in making a cut, such as reducing income tax by up to 2p.
However, Johnson said such a cut would be a “political and not an economic decision” that came with risks. “Two pence off income tax is quite a big change,” he said. “That’s something like £15bn. The big question for the chancellor then would be, how’s the Bank of England going to respond?
“The nightmare scenario will be a nasty market reaction, a la Truss. But an almost equal nightmare reaction would be the Bank saying, ‘We were effectively saying that we were keeping interest rates steady, but now you’ve just injected an extra £15bn into the economy. We’re still worried about inflation and we’re going to put them up’. That should weigh very heavily in any decision on tax cuts.
“A £15bn cut in tax this side of March - without concrete tax rises or spending cuts proposed to offset it - it would be a political and not an economic decision.”
Something being a political, not economic, decision should not be a total disproof of the decision itself. We do have elections so that we can choose between different political visions after all.
However, that more technical point there. If the current government cuts taxes by £15 billion, without also cutting spending to match, then the expansionary effect will - likely enough - be offset by the Bank of England changing interest rates.
The expansionary - or contractionary - stance of fiscal policy is offset by the equal and opposite effects of monetary policy. Therefore the overall stance is not something in the power of the government. That is the Sumner point. It’s something that is so embedded in serious thinking on the subject that here we’ve the IFS warning about it.
What this means is that if the current government wants to cut taxes by £15 billion then they should also cut spending by £15 billion. A thoroughly good idea of course. Indeed, give us a free hand and we’ll find £150 billion in spending to cut. Certainly £100 billion because O’Rourke’s Principle of Circumcision is correct - you can take 10% off the top of absolutely anything.
But the Sumner point stands - government is not in control of the stance of policy because the fiscal stance is and will be offset by the monetary stance. Which is fine of course. This leaves government in charge of fiscal policy. How much is to be taken off the populace to be spent upon what?
Less, obviously.