Lessons from Britain on the balance between monetary and fiscal policy

lessons from britain on the balance between monetary and fiscal policy

Sumary of Lessons from Britain on the balance between monetary and fiscal policy:

  • Jul 24th 2021NOWADAYS THE Bank of England, like most rich-country central banks, has two main functions: maintaining monetary stability and ensuring the soundness of the financial system.
  • ) That function was only hived off to the newly created Debt Management Office (DMO) in 1997, when the bank was given free rein over monetary policy.
  • That has, awkwardly, dragged it back into the realm of public-debt management.
  • Britain ran a fiscal deficit of 14.3% of GDP in the latest financial year, higher than in any peacetime year on record and comparable to the wartime borrowing of 1914-18 or 1939-45. The stock of government debt has risen from around 80% of GDP before covid-19 to 100%.
  • The pandemic is the second fiscal shock in little over a decade, after the global financial crisis of 2007-09. As the experience of managing debt after war shows, the divisions between fiscal and monetary policy can often become hazy in times of high public debt and wide deficits, and especially so during crises.
  • In the latest financial year debt rose to its highest since the early 1960s but the ratio of interest costs to tax receipts dropped to new lows (see chart).
  • John Maynard Keynes outlined his plans for a “three per cent war”.
  • Monetary policy was made subservient to debt management and the purpose of the Bank of England became to help finance war.

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