Hoping for slacker fiscal rules..

Chris Giles is the FT’s economic correspondent and in a tweet he has said “I’ve suggested a looser fiscal framework than John McDonnell and Sajid Javid.”

Perhaps he’s just listened to Alexei Sale on Radio 4 “Austerity is the idea that the global financial crash of 2008 was caused by there being too many libraries in Wolverhampton.”

Giles’ piece explains:

Currently, the [fiscal debt] rule sets a target for public sector net debt as a percentage of gross domestic product to be falling in 2020-21. This debt rule has outlived its usefulness and needs to go.

He hasn’t really changed his outlook that much as we see when he says:

The fact that the debt rule is now the primary constraint on both the Conservative and Labour parties seeking to buy votes with grand spending pledges suggests it is serving its purpose in helping to guard against unsustainable electoral politics.

It would be an interesting debate to consider what exactly unsustainable electoral politics were. To me he has just called democracy unsustainable. But as he is the FT’s economics correspondent perhaps we should have low expectations. Which makes this following paragraph all the more surprising and important:

The debt rules were always far from optimal. Economic theory tells us very little about the right level of public debt. Limiting its rise has also forced politicians into bending the rules, for example by “paying” for public investment by attracting private finance at unnecessary cost. Most important, the focus on one side of the public sector balance sheet encouraged the deterioration of the fabric of the country. It is not an exaggeration to say that the debt rule explains deficient UK infrastructure spending and inadequate social housing in high demand areas. It will hinder the government’s ability to help the adoption of low carbon technology.

He hasn’t really got it because he still goes on to call for the balancing of the government’s current budget, but he does suggest that the government should consider public assets as well as liabilities (and all those unnecessary Private Finance Initiative contracts are most definitely public liabilities in every sense). He continues by suggesting that the government should “commit to publishing their objectives for capital spending — including, for example, affordability targets for young people’s housing costs, targets for carbon emissions and productivity growth targets resulting from better infrastructure. The Office of Budget Responsibility would then assess the success of government in meeting these objectives alongside the sustainability of the public finances.
This seems to me rather a good idea as it doesn’t target money so much as the objectives of spending it and that can surely represent only an improvement on our current obsessive and prolonged austerity.

This is a welcome chink in the monetary armour of a conventional economist – and one at the FT at that.

We probably need a few more jokes from Alexei Sale to prize that chink open a little wider…


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  3. Johnson Matthey -

    Alexei Sayle’s joke doesn’t work.
    In real terms the money spent on libraries (of all kinds) in Wolverhampton was greater in 2017 than it was in 2007.
    If you want to be funny, perhaps go after an assault on our freedom, such as the immigration rules under Theresa May, or the ban on mood altering drugs which has led to a spike in drug related deaths and an uptick in suicides. You could argue that government spending has been badly allocated. But DO NOT pretend that government spending has been insufficient, when aggregate spending per head in the last 10 years is the highest it has ever been.
    Denying that basic point is NOT FUNNY.

    1. Peter May -

      I bow to your superior knowledge on the libraries on Wolverhampton – perhaps he should have chosen Northampton instead? https://www.theguardian.com/books/2017/nov/28/northamptonshire-may-close-up-to-28-of-its-36-libraries
      The point is the same.
      I still do very much suggest that government expenditure has been insufficient as well as appallingly allocated. Aggregate expenditure per head may have increased but, as people’s wages have reduced in real terms since 2007 and inequality increased in the same period 2007 we should expect it to have increased much more than it has.

  4. Paul Mayor -

    Surely the issue has to be where the money is being spent. Local government has endured over 40 per cent cuts in the rate support grant, the number of serving police has been cut by 20,000 and benefits to the disabled, especially, have been cut to name but a few examples. This government has consistently argued that austerity i.e. cuts are vital to reduce the deficit but aggregate spending per capita has increased therefore the programme of government spending cuts was never a cure as the deficit has reduced anyway. It was a justification,making life a misery for those mainly at the ‘bottom’. ‘Austerity’ was never cured by austerity. Can someone please explain where the money has gone:. Probably tax cuts to the already wealthy is my suggestion.

    1. Peter May -

      This is really a result, I’d suggest, of us all earning less, in real terms, since 2007. With all the efforts to reduce “welfare” with penalties and so on that expenditure has overall increased and it is now administered in a semi-privatised way, which soaks up more expenditure – and without reaching the ‘front line’. Likewise for the NHS.
      And although individually capped there is less social housing than ever and even more housing benefit than ever required. Meanwhile there always seem to be vast sums available for consultants, which I’m never sure if they’re included in any budget at all…

  5. troublemaker -

    If it’s true that

    a/ The government has a monopoly on the issue of pounds in the UK and

    b/ A pound is simply a government IOU (“I promise to pay the bearer on demand the sum of one pound”) and

    c/ The government spends money by entering numbers on a computer (thereby crediting the bank accounts of payees), then it follows that

    1. There is no limit, in principle, to the amount of money the government can spend.

    2. The government doesn’t need to collect taxes in order to pay for spending. (Why would the government want to collect or borrow its own IOUs?).

    3. Questions such as “How are you going to pay for it?” are meaningless – the government pays for anything it wants by issuing pounds.

    4. The whole idea of a “fiscal rule” is nonsense – the government can always service and repay any amount of debt (as long as it’s in pounds) simply by entering numbers on a computer.

    Bear in mind that, when the government spends money, every penny goes into the bank accounts of individuals and businesses around the country, increasing their purchasing power. Meanwhile, taxes take money out of circulation and reduce their purchasing power.

    It follows that budget deficits (a net increase of money in circulation) boost economic activity, business profits and people’s ability to save, while balanced budgets and budget surpluses have the opposite, negative, effects. (Contrary to conventional wisdom, budget deficits also lower interest rates).

    What about the inflationary effects of “too much” government spending? Japan has run enormous budget “deficits” and accumulated a huge public “debt” over the past two decades but it has close to zero inflation and one of the world’s strongest currencies.

    For the next government, the question is not whether we have enough money or too much debt. It’s whether we have the human, technological and other real resources needed to begin repairing the damage done to the country’s social and physical infrastructure over the past decade and then to try to catch up with the rest of the developed world.

    1. Peter May -

      Agreed entirley.

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