Tuesday, 13 October 2015

Nonsense about fiscal responsibility


Our Chancellor of the Exchequer, George Osborne, is to introduce his (revised?) Charter of Fiscal Responsibility into parliament tomorrow. As I understand it the charter is to require that, from three years on,  every government, in normal times, must run a budget surplus.

Even if it made economic sense, such a charter would be nonsense. Under the British Constitution no parliament can bind a future parliament, or even future decisions of the same parliament, so any government with a parliamentary majority which wanted to repeal the charter could do so.  And of course, the definition of "normal times" can be varied to suite whoever wishes to describe the times as abnormal.

So this is just a piece of political grandstanding by Osborne, designed to embarrass the Labour opposition, which the Tory PR machine and compliant media have managed to tarnish as being  of questionable economic probity.  John McDonnell, Labour's Shadow Chancellor, is not helping to regain their credibility by flip-flopping on the issue, having first announced that he would support the charter and now deciding, sensibly, that Labour will vote against (and I fervently hope, the Liberal Democrats too, or Keynes will be turning in his grave.*)

Keynes demonstrated that balancing the budget, come hell or high water, is an inadequate policy.  He showed that in times of recession caused by inadequate demand the government should run a budget deficit in order to make up the short-fall and maintain or achieve full employment, and in times of over-heating the government should run a budget surplus both in order to recoup the money spent in the recession, and to dampen down inflationary pressures.  Fine tuning of the economy in this way is what the modern chancellor should be attempting.  Osborne's policies are a throwback to the 1930s and before.

Strictly speaking it is not even necessary to balance the budget in the long run.  Even humble "A" level text-books have long  suggested that a prudent chancellor should aim for a  long-run budget deficit of around 3% of GDP.  The value, and cost of repayment, of the subsequently accumulated national debt, will be reduced through growth and inflation.  If however, we are to aim for "prosperity without growth," which I believe we should,  that percentage will have to be revised.

Even so, as Larry Elliot pointed out in an article some time ago, if the economy grows at 5% in money terms, as the UK's has done, on average, since the war, than long term borrowing at only 3% in money terms will gradually reduce the Debt:GDP ratio.

The really serious deficit in the British Economy is the current account of the balance of payments, which is running at or very near a dangerously high level of 6%.  Unlike  the internal deficit (ie that discussed above), which is largely "money we owe ourselves," this external deficit really is a burden on future generations.  It really will have to be paid back some day.

Rather than tackle the problem by measure to increase efficiency and productivity, Osborne's only policy seems to be to buy time and postpone the evil day by flogging off national assets with foreigners as eager and willing customers (yet more of the Post Office to go to "US institutional investors" any time now, with Northern Rock, the Ordnance Survey and Channel 4  in the pipeline).

* Happily they did, so Keynes can rest.  (added 18th October)

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