A former Conservative Treasury minister weighed in on the government’s economic policy on Monday, calling the level of interest rates “ridiculous” and its handling of the budget “crazy”.
Lord Jim O’Neill, who was appointed to government by David Cameron and George Osborne in 2015, argued that the government should spend much more on education, health and devolution and should limit any inflationary pressure with rates much higher interest.
But although O’Neill, who was previously chief economist at Goldman Sachs, was highly critical of the government’s monetary and fiscal policy, he backed Boris Johnson’s upgrade white paper, saying that it was “one of the most important things to come out of government in a long time”.
However, O’Neill spent almost no time talking about leveling and instead criticized the economic policies of the General Government.
He told MPs the Treasury Committee of the Communes that the Bank of England had erred in being so late to see the danger of inflation, saying that the spending hike, which pushed prices higher after the coronavirus crisis subsided, was ” one of the most predictable covers we’ve ever had.”
O’Neil said he would have voted to raise interest rates and end quantitative easing throughout the past year because the recovery was so strong. “It seems quite clear that not only the Bank [of England] but other central banks should not have behaved as they have over the past two years,” he added.
In a candid session, O’Neill made it clear that he believed Britain’s economic policy should be rebalanced so that government borrowing and government investment are higher and extra demand is offset by higher interest rates. higher to keep overall spending and inflation under control.
“I personally think the whole inflation targeting framework is past its expiration date,” O’Neill said. Calling instead for “a change of mentality” and much higher public investment and “massive devolution”, he asked: “why is there such confidence in the need to reduce the deficit?”
“Yes [government] the debt has increased to 100% [of national income] because we have a proper structural approach to spending on education so that we don’t have the high number of people who can’t do what they should [be able to] To do [coming] out of our primary and secondary schools. . . I would welcome it positively”.
As well as calling for much bigger deficits and higher public investment, he told MPs that interest rates, which hit 0.5% last week, “are at a ridiculous level” and that the BoE should think about “a 4% interest rate target”.
“The government must step out of the prisoner of circumstances and ensure that the trend growth rate does not continue to decline,” O’Neill added.
The former treasury minister also said there had to be a better way to formulate the budget than to rely on the Office of Budget Responsibility to forecast the deficit and then respond with either a spending windfall or a austerity.
“It’s a crazy situation where the biggest change in the outcome of next year’s budget is simply because three people at the OBR changed the economic forecast,” he said. “This is completely crazy.”
The other economists who testified alongside O’Neill disagreed on the causes of inflation and the culpability of the BoE, but all suggested that increased public investment in education and infrastructure had the best chance of raising the underlying rate of productivity growth in the UK.
Roger Bootle, chairman of Capital Economics, said the BoE had been too slow to tackle inflation, which is expected to hit 7%, and people would naturally seek wage increases as a result.
Jagjit Chadha, director of the National Institute for Economic and Social Research, said it was “extremely important” for the BoE to act to bring down inflation with higher interest rates without causing a recession.
Ann Pettifor, director of Prime Economics, disagreed, saying that the high inflation was mainly caused by an increase in freight, energy and fuel prices, and that “the BoE cannot be held accountable for this. responsible”.