Britain's New Fiscal Rule Is Dumb
Earlier this week, the British House of Commons adopted new rules committing the government to running a budget surplus in "normal times." The vote was widely hailed as a success for Conservative Chancellor of the Exchequer George Osborne -- not because it installed a sensible policy but because it pitched the Labour Party and its new leader, Jeremy Corbyn, into an even more laughable state of disarray.
Smart politics, you see. But take a moment to note that Osborne's fiscal charter is nonsense, at best, and that Corbyn was quite right to oppose it. Also note that Osborne, in pressing this change for merely tactical purposes, elevated the goal of embarrassing his flailing opponents over the demands of sound economic policy. So much for the Tories' claim that they can be trusted with the economy.
Corbyn, admittedly, is so clueless that he presents an almost irresistible target. His latest embarrassment is, again, self-inflicted. Labour's new leaders initially said they'd back the revised charter, because they feared being accused of fiscal irresponsibility. On further reflection, perhaps emboldened by some newly appointed economic advisers, Corbyn and his Shadow Chancellor decided to oppose it, and told their members of parliament to vote no. The reversal infuriated many of their MPs; 21 defied their instructions and abstained.
Corbyn sparks rebellion! Advantage, Osborne!
That isn't the important story. Corbyn and his team have plenty of reckless ideas for economic policy, but opposing the fiscal charter isn't one of them. Osborne's rule makes no sense. At best, it's pointless -- so vague, elastic and easily revisable should the occasion arise that it won't make any difference. But if the rule does turn out to make a difference, constraining fiscal policy in the way it seems intended to, it would be worse than useless.
Reducing the burden of public debt over the medium and longer term is an intelligent policy goal, not least because an effective response to future recessions requires adequate fiscal space -- that is, room to push public borrowing back up. But tight fiscal policy in the short term won't serve that goal if it throttles growth.
There's no need for a surplus if the aim is to bring down the debt ratio. A balanced budget, or even a smallish deficit, will do that over time so long as the economy keeps growing. With the British economy still in the doldrums and interest rates on the floor, there's no virtue in striving for a faster decline than that -- especially if it inhibits growth and turns out to be counterproductive. If a spell of tighter fiscal policy turns out to make sense later because growth accelerates, well and good. The Treasury can act accordingly. Why try to encode that contingency in a binding rule that, when push comes to shove, won't bind anyway?
In principle, institutional pressure to contain the tendency of public debt to drift higher (economists call this "deficit bias") has much to be said for it. Experience, for instance with the euro area's countless failed stability pacts, suggests that fiscal rules aren't the best way. Independent fiscal agencies or councils are more promising. These are bodies that review fiscal policy and use disclosure and persuasion to put the issue of long-term fiscal consolidation in front of the public.
The U.K. has such an agency in the Office of Budget Responsibility, but its remit is narrow. Essentially, it provides fiscal forecasts, serving as check on the Treasury's calculations in discussing fiscal projections. If Osborne were serious about binding the government more effectively to be fiscally responsible, he'd propose widening the OBR's mandate so that it included giving public policy advice.
In 2010, when Labour was in power, it proposed a fiscal-responsibility rule of its own. Osborne laughed at the idea, telling the Commons that the plan was "vacuous and irrelevant." That nicely sums up his own proposal, and his Commons win this week.
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