A Plan B for the UK? (Part 2)
In my last post I wrote about what the government could do to support Britain's faltering recovery, and how Mr Osborne might borrow more - without formally having to announce a "Plan B". (Since we can be pretty confident he will never do that.)
It turns out there's a wrinkle in my analysis. It doesn't change the basic story, but if I'm right about what the Treasury is planning, it will add to the impression that Mr Osborne is avoiding a formal change of policy, only by being quite flexible with his definitions.
You'll remember on Friday I said that more cyclical borrowing (solely due to slower growth) didn't affect the measure of borrowing that the Chancellor has targeted.
He can also borrow more for public investment under this rule. But extra borrowing along these lines could make it harder to meet the second fiscal rule, which says that Public Sector Net Debt must be falling in 2015-16.
I said the Chancellor could borrow more to support "credit easing", because borrowing to buy or guarantee financial assets would not be included in that debt ratio.
That is true, but not for the reason I stated.
Room for manoeuvre
The ONS does not consider business loans to be "liquid assets" for these purposes, so any borrowing for programmes to support business lending - for example, to buy corporate bonds or packages of small business loans - would be included in Public Sector Net Debt.
But since September 2008 there have been two definitions of public sector net borrowing and public sector net debt, depending on whether the "temporary effects of financial sector interventions" are included.
That is what gives Mr Osborne the wiggle room for more borrowing to support lending.
There is now a big gap between the two definitions of net debt, largely because the ONS took the decision to include all of the balance sheets of the banks that are majority owned by the public sector.
In the second quarter of 2011, net debt (excluding financial sector interventions) was £944.2bn, or nearly 62% of GDP.
Including financial sector transactions, the net debt stood at £2,259bn - that's nearly 150 per cent of GDP. (The so called "Maastricht" definition of General Government Debt is also larger than the one the government prefers, but at least in the same ballpark: in 2011-12 it's forecast to rise to about 85 per cent of GDP.)
At the time of Alistair Darling's 2009 Budget, the Treasury asserted that most of the recent interventions to prop up banks, like buying shares in RBS or Northern Rock, "did not constitute borrowing, as one financial asset is being exchanged for another."
Whatever "credit easing" turns out to mean, you can expect the Treasury to make the same claim. And the ONS will probably agree, especially if it comes down to using the existing Asset Purchase Facility, at the Bank of England, to buy corporate bonds.
Whether the ONS will feel the same way about other schemes to support investment in housing, construction or other parts of the real economy is less clear.
But I bet the Treasury will try to make the case.
The bottom line? The bottom line is that Alistair Darling, of all people, may have provided Mr Osborne with the wiggle room that he needs to announce a Plan A-plus which leaves his iron credentials intact - at least on paper.
On the official version of events, Mr Osborne's credit easing will be an example of "monetary activism", as he suggests - not fiscal policy as many might imagine.
That's despite the fact that the Bank of England is supposed to be in charge of monetary policy now, not the Chancellor. And despite the fact that Mervyn King himself has said that lending to businesses in this way is indeed fiscal policy - a kind of industrial policy - which is why the Bank of England isn't doing it. Phew.