Fiscal Rules Dumped

MONDAY, SEPTEMBER 29, 2008

Fiscal Rules Dumped

Gearing up for the crazee 70s in Brum

Oh dear.

We listened to George's speech today on a lashed-up TV in a Brum bar. We weren't able to get into the main Conference hall, because once again party organisers have hugely overbooked for the size of hall they've laid on - you'd almost think they don't value their paying customers.

But set that on one side. The really disappointing bit was George's abandonment of fiscal rules.

As you will have heard, he's published an economic plan - the Reconstruction Plan for a Strong Economy. Given all the hype, it's surpising no hard copies have been available to ordinary members at the Conference - only to journos - but we eventually read it here. And not only is he rejecting BOM's favourite third fiscal rule -the one that limits the growth of public spending - he's even dropping Gordo's existing rules.

Picking up Gordo's wholesale and outrageous fiddling of these rules, he says:

"The failure of the fiscal rules in Britain is consistent with the emerging conclusions of the academic literature on the shortcomings of rules in general. Both on paper and in reality, simple rules have been found to be either too loose to be effective, or so inflexible that governments break them, undermining their credibility. While it might be theoretically possible to design a rule that was right in all situations, it would be so complex that it would be impossible to operate in practice.

Instead, economists increasingly argue that institutional change to introduce a greater degree of independent monitoring into fiscal policy is better than any rules based system. This would operate through the introduction of an independent “fiscal council” with responsibility for ensuring sustainable public finances."

We don't like the sound of this at all.

First, we don't agree that "economists" are saying what George claims. As we've blogged several times (eg here), a recent major study from the OECD recommends"fiscal rules with embedded expenditure targets".

Second, putting these matters in the hands of an unelected quango is asking for all the usual problems with unelected quangos - who appoints the quangocrats etc etc (and note this is a much more complex issue than the Bank of England's "simple" task of managing inflation).

Third, this framework makes tax cuts even less likely.

We are now in a disastrous position on public borrowing and debt, combined with a prolonged period of what's known in polite circles as "sub-par growth" (aka stagnation). As we blogged last week, we now need tax cuts more than ever in order to refire growth. And even if you don't accept the case for unfunded tax cuts (ie the argument that cuts will pay for themselves via their "dynamic" effect on growth), tax cuts certainly boost growth. A Tory government should be straining every sinew to create room for tax cuts by cutting public spending.

We believe that a third fiscal rule provides a very public target to guide our politicians into delivering the necessary spending restraint. But George's official monitoring body will not even look at spending - only at borrowing and debt. It will be the same two-legged stool as Gordo cobbled together. It puts absolutely no pressure on George to cut either spending or taxes.

Very disappointing.