I am proud of being a left wing fiscal conservative. Unfortunately, being a fiscal conservative is synonymous with economic illiteracy for much of the left. This is because what has tended to be defined as ‘conservatism’ is an intention to cut public spending or increase taxation at any or all points in the economic cycle.
This is, as critics point out, stupid. If the criticism of the last Government was that it failed to ‘mend the roof while the sun was shining’, this government tore down the tarpaulin during the worst of the storm. That’s not the action of a careful, cautious conservative. That’s just dumb.
This Government has pursued what I call ‘arse about tit’ Fiscal conservatism.
It decided it had to reduce the budget deficit immediately irrespective of the economic conditions it faced. As a result, we find that now, 4 years later, borrowing is rising, and faced with the prospect of losing an election, the government eases off on cuts today and promises a whole series unfunded spending pledges tomorrow.
Worse, we’ve somehow got to find tens of billions in savings or tax rises in the next parliament, when the electorate feel they’ve done the hard work.
On top of that, we’re just as exposed to downside risks like the performance of the Eurozone, as we would have been if we hadn’t cut in 2010-111.
With the economy growing, on both left and right, the pressure to say ‘We cut through a recession, maybe we should loosen during growth’ is growing. Needing to win an election, politics is retreating into a series of pleasant fantasies. After arse about tit conservatism comes an inevitable companion – political pressure for looseness when policy should tighten.
On the right, this seems to be a call for unfunded tax cuts to the middle classes. On the left, it manifests as an inchoate desire for boldness, which usually translates as a spending pledge if you pin the shadow minister down.
I suspect the Shadow Treasury team and the leaders office have to do such pinning fairly regularly, which probably results in said shadow phoning up friends and complaining about a lack of vision.
On a more elevated level, Howard Reed and Richard Murphy are preparing to call for a fiscal policy from 2015 onwards that involves reversing ‘most’ spending cuts achieved from 2010, seemingly paid for by QE. Since this policy seems to be advocated whatever the growth rate is expected to be, it appears there is never a good time to show fiscal restraint.
Actually, that’s unfair. Reed advocates an 18 month national conversation to decide what to do about everything from Land Value tax to Basic Income. The results of this conversation will produce a ‘highly progressive’ plan for current balanced budget 3 years into the next parliament. I am sure such a policy would not cause any political, transitional or implementation problems whatsoever.
However, let me agree, partially. We do need a mechanism that helps us avoid both arse about tit conservatism and the fools expansion that result from it. I don’t think it’s a national conversation, though.
The obvious route is a smarter fiscal rule – there has been some debate on this, but it seems to have been a little quieter recently, perhaps as it is clearer that even a smart fiscal rule would emphasise the need for fiscal tightening in the near future.
So we need not just a better fiscal rule, but better monitoring thereof. I’ve advocated a National Fiscal council, which would go beyond the role of the OBR, and on the Chilean model, tell government when it should expand, and when it should restrict growth.
Most left-wingers react negatively to this, on the basis that they think the OBR has not helped produce a smarter fiscal policy. I feel this is unfair, because the OBR is charged with working out if the Government if reaching their fiscal rules, when the problem is with the Fiscal Rules themselves as there is no reference at all to what the appropriate timing of deficit reduction is, in reference to the wider economy.
That’s why I prefer the Chilean model, which a little like the interest rate target, gives advisory councils’ power to estimate trend GDP and from there suggest when policy should be expansionary and when it needs to contract in order to meet their fiscal rule.
Further, The Chilean economy is, like ours, subject to huge variation due to one business sector performance (In their case, Copper, in ours, Financial Services). A British fiscal council empowered to demand greater fiscal caution when financial services tax revenues are soaring would be an excellent brake on pro-cyclical over-optimism.
To me, this creates a far better chance of producing policy that addresses the actual needs of the economy, and as most parties have the professed intention of following reasonably sensible fiscal objectives, would perform the key function of fiscal oversight – preventing the sort of voter-pleasing fiscal slippage that the Government is currently pursuing as a result of their past failure, and preventing the kind of pro-cyclical reaction that got them into this mess in the first place.
To me, this would be genuinely cautious, careful Fiscal Conservatism in action – focusing on long term stability, restraining short term over optimism and pessimism, holding politicians to their best intentions, allowing the flexibility in investment and stimulus that is clearly needed in moments of crisis, while restraining government tendency to project current success as far as possible into the future.
What’s not to like?
Oh, that it wouldn’t allow too many pleasant fantasies.
I tell you what though. I’d love to see such a Fiscal Council analyse UKIP economic policy.
- I am sure I’m going to get some ‘but hold on, you wrote In The Black Labour. You wanted us to cut back in 2011.’ To which all I can say is: No, we didn’t. As I said back then: “In a demand crisis, you need to take action, and do so dramatically and boldly” We accepted the need for running higher deficit during recession, but urged a policy of clear Fiscal restraint when growth returned [↩]