New inflation data today shows price increases are still well below the UK’s 2% target.

What makes better economic sense right now: Increasing government stimulus, or underspending to avoid inflation? Why greater spending is without doubt the best approach.. A thread! (1/10)

The Bank Rate is the rate at which the Bank of England can lend money to commercial banks. It is used to stimulate demand in hard times. Lowering rates = cheaper lending, reducing the cost of mortgages, personal credit, etc. (2/10)

Once lower rates have succeeded in stimulating the economy to reach its maximum potential, the Bank of England is supposed to increase the Bank Rate to prevent inflation (a sustained rise in the price of goods). (3/10)

The fact interest rates are at record lows today, and have never recovered to pre-2009 levels, is a strong sign there’s still a lack of demand. In other words, the UK economy hasn’t regained the buoyancy it had as before the financial crash. (4/10)

That would mean that more fiscal stimulus - from reduced tax or increased spending - would be economically and socially sensible. Its effects would cascade and multiply through the economy, boosting jobs and disposable incomes without creating harmful inflation. (5/10)

But the UK’s persistently low interest rates also mean that even if we were wrong & further stimulus were to overheat the economy, there is plenty of room for the independent central bank to raise rates and offset inflation without creating historically high lending costs. (6/10)

To sum up, here are the risks of each scenario:

- Inadequate stimulus: inevitably results in permanently lower living standards.
- Too much stimulus: comparatively trivial inflation rise, and easily reversible (unlikely to be an issue, given the context).
(7/10)

And here are the possible benefits:

- Avoid too much stimulus: a lower risk of inflation, which is unlikely and reversible
- Provide sufficient stimulus: Protect incomes, jobs, public services, and living standards, and with a green recovery plan, our environment too.
(8/10)

So, surely the choice to err on the side of less stimulus than we need is a political one. It makes no economic sense. (9/10)

For more on this: http://neweconomics.org/2019/08/time-for-demand (esp ch. 2)

On the cost of austerity: http://neweconomics.org/2019/02/austerity-is-subduing-uk-economy-by-more-than-3-600-per-household-this-year

The costs of public debt:
https://neweconomics.org/2021/03/pick-a-number-any-number

And fiscal rules and the wider costs of inaction: http://neweconomics.org/2019/07/changing-the-fiscal-rules
(10/10)