A simple fiscal rule

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I mentioned yesterday the way in which party manifestos have been criticised by various think tanks over their tax and spending proposals.  It has unfortunately become widely, but erroneously, accepted that government spending is like household spending, and that governments should only spend money which they have first raised through taxation.  For the last few elections, all three of the main UK parties have taken this as being close to gospel and criticised each other for any apparent mismatches, elevating the elimination of the surplus to almost a fetish.  It’s been strange, though, that although it’s the Tories who have pushed this approach most, it is the Tories who also, in practice, have regularly ignored this ‘requirement’, pushing the date at which the budget is balanced ever further into the future, whilst Labour have, rather foolishly, allowed their own economic policies to be defined by this crude and unnecessary approach.  The Tories set a trap and Labour fell for it – maybe not so strange after all, then.

Things look different in this election – the rhetoric about ‘fully-costed’ manifestos is still there, but it all seems half-hearted given that the Tories have thrown their own rules to one side and decided to simply spend more.  Only the Lib Dems are still really hung up about the mad demand that the budget should be balanced, leading them to propose what is probably the stupidest economic policy ever put forward by a major UK party, that the government should run a permanent surplus on its current expenditure budget, regardless of the circumstances at the time.  Richard Murphy sets out some pretty trenchant views on the proposal here, and has a nice graphic from Deficit Owls asking why politicians want to push people into debt here.

There is, and never has been, any need to keep the government’s spending in balance; it is the economy as a whole which needs to be in balance, bearing in mind the various sectors.  The concept of sectoral balances is explained well here with a particularly good graphic, but in essence, a permanent public sector surplus requires a permanent deficit elsewhere, and that essentially means businesses and individuals in the private sector.  Anyone arguing for a public sector surplus needs to be able to explain why a private sector deficit is a good idea, and that’s not an explanation that I’ve heard to date.

All the parties are keen on having, and being seen to have, a set of ‘fiscal rules’, but in practice these are largely ignored.  They’re just window-dressing as an alternative to trying to explain why things don’t work that way.  In reality, the only fiscal rule any government needs is one that says it will do what it considers appropriate in the circumstances which exist at the time.  That’s not much of a rule at all, but any other rule is just a means of trying to hide the fact that government spending is more a matter of ideology than economics.