Chancellors must free themselves from the straitjacket of pledges and forecasts, writes Bill Jamieson
What is the “Golden Rule” by which UK chancellors should abide? And what is the Golden Rule that chancellors habitually break, despite all the traumas of history and experience?
It is to avoid commitments that would limit and prescribe freedom of action when circumstance requires.
Some of the greatest difficulties in government management of the economy arise because of an earnest attachment to rules laid down in previous eras - ones innocent of the unforeseen crises and challenges that can arise down the track.
That is why I am a sceptic over Chancellor George Osborne’s championing of the Charter for Fiscal Responsibility. He may have revelled yesterday over the disarray in the Labour opposition and the political embarrassment over shadow chancellor John McDonnell’s volte face on his party’s – and his own – endorsement of this Charter as recently as barely two weeks ago.
But my scepticism does not share Mr McDonnell’s concern to sort out what he says is “not a change of strategy but only parliamentary tactics” – with all too little explanation of this tactical rationale. My concern has more to do with a fundamental doubt over the wisdom of setting down rules and commitments over budgetary management stretching into a future which we cannot predict and over which we have no control.
Our economic history is pockmarked by examples of broken rules and abandoned pledges. Prior to the 2007-09 financial crisis few would have dared to advocate that interest rates would be taken to an ultra-low level of 0.5 per cent; that the government would resort to monetary expansion through Quantitative Easing; that large companies would be rescued from the consequences of their own excesses and misjudgments by massive injections of public funds; and that government deficit and debt would be allowed to balloon out to virtually unprecedented levels as a percentage of national income.
All this was ban and anathema to those who since the early 1970s had battled against inflation and the consequences of excessive spending and borrowing. The arrival of an IMF team in 1976 – and a sharp change in Labour’s spending commitments – is seared in the Treasury memory.
Few are more acutely aware of the cruelty of events than those who championed the European single currency. This was founded on legal requirements (the Maastricht Treaty) laying down strict rules for participating countries on the maximum allowable annual budget deficit (3 per cent of GDP) and maximum level of public debt (60 per cent of GDP). There were even sanctions and penalties to be imposed for those who breached the rules.
All this crumbled to dust with the 2007-09 financial crisis, followed by the imposition of austerity economics on Ireland and the “Club Med” economies – Greece most spectacularly, to make good the borrowing binge that followed the “one-size fits all” Euro interest rate.
The resulting years of pain and continuous crisis summits of Euro finance ministers have hugely damaged confidence in the single currency and killed off any residual support for UK membership for the foreseeable future.
Throughout the long era of the Gordon Brown chancellorship, each of his budgets carried sonorous invocations of “golden rules”, with forecasts of the budget deficit diminishing as a share of GDP – on a far horizon.
This incantation of fiscal continence was taken up by George Osborne and regularly repeated. But each Budget projection was followed by a failure to meet the fiscal targets set. The Labour opposition then found itself caught in a policy paradox – of simultaneously attacking the government for failing to hit its deficit and debt reduction targets while urging that the government ease up on austerity and spending constraint.
Now we have in the Charter for Fiscal Responsibility an obsessive return to “targetitis” – earnest pledges to make the annual budget deficit disappear by a certain date and bring down the level of debt as a proportion of GDP. Who could quibble at such a commitment to good behaviour ahead? But who really believes it?
The Charter objectives are declaimed as if such incantation of rules would by itself serve as a substitute for day-to-day fiscal discipline. And that is why the problem of relentless borrowing persists. As George Osborne pointed out yesterday, loading debts on to future taxpayers that they can never hope to repay “is not socialist compassion – it’s economic cruelty”.
For the record, the Charter itself is not a post-election device rushed in by Osborne to embarrass Labour. Its origins lie in the Budget Responsibility & National Audit Act 2011 passed by the Lib Dem-Conservative coalition. This required the government to prepare a document (now known as the Charter) relating to the formulation and implementation of fiscal policy and policy for the management of the national debt. The Act requires that the Charter includes the government’s objectives for fiscal policy and its objective for the management of the national debt, its fiscal mandate, and the minimum requirements of the Financial Statement and Budget Report.
It sets out commitments “to operate fiscal policy transparently and managing sustainable public finances in the long-term interests of the UK.” A central role would be played by the Office for Budget Responsibility set up in 2010 designed to address past weaknesses in economic and fiscal forecasting and, consequently, fiscal policy.
So far so good – if those forecasts prove true. “In normal times”, it declares (a phrase seldom uttered in the Treasury without a suppressed guffaw) “once a headline surplus has been achieved”, the Treasury should set target for a surplus on public sector net borrowing in each subsequent year. It is required to set a target for a surplus on public sector net borrowing by the end of 2019-20. This is supplemented by a target for public sector net debt as a percentage of GDP to be falling in each year.
The fear is that, without such fiscal targets, governments would run amok and resort to huge borrowing. But arguably the greatest sanctions on excessive debt are the sanctions and penalties that inevitably follow – the withdrawal of overseas funds from the UK, a sterling crisis – and an enormous penalty by way of soaring debt interest charges. Boom and bust is as much the product of political mismanagement of public finances as the vagaries of the business cycle. Today debt interest charges suck a net £34.6 billion annually out of the national coffers – and there is a perfectly respectable progressive case for bearing down on them.
As in the Barber boom, the Wilson era, the Lawson boom and bust, the Brown boom and bust and the persistence, seven years after the financial crisis of a government debt of £1.5 trillion or 80.3 per cent of GDP, chancellors face outcomes that vary greatly from the forecasts that guided their actions.
Time and again chancellors need the space and freedom to respond to circumstances and avoid what might otherwise develop into a serious recession. As for prudent management, faith in forecasts of disappearing deficits three or four years out are no substitute for the need for constant discipline on government spending and borrowing.