It is a matter of great personal torment for me to see Tory commentators tearing their hair out about the government’s continued failure to reduce public borrowing.
While their explanations for this failure of policy are considerably off the mark, as Jonathan Portes laid out very clearly, there is just enough truth in their analysis to make the subject politically interesting.
As Mr Portes notes:
“Public sector current spending overall is roughly flat in real terms, with cuts in some areas offset by the operation of the automatic stabilisers. As yet, so far, there has been relatively little (overall) austerity in public services, with health and schools protected, although local authority services have suffered.”
Here is the nuts and bolts of their problem: The idea that in the midst of a demand slump, a fiscal tightening is fiscally conservative is wrong.
It is instead, fiscally risky at best, fiscally dangerous at worst.
A far more effective approach and conservative, risk averse approach is to deliberately stimulate in the short term, and then hold down spending below once growth is recovering, so debt as a share of GDP falls.
The counter argument to this is, of course, that things would be worse if short-term tightening had not been attempted, especially as those old devils, external factors play such a significant role in any fiscal path.
This argument is not stupid. There are three elements to it that have real force.
First, What further short term borrowing is needed to impact GDP growth? How can we be certain the borrowing would not be wasted?
Second, would that borrowing have proven expensive given bond markets fears of fiscal expansion?
Third, would a government that embarked on such an expansionary short term path ever display the dour fiscal virtue such a strategy requires in the long term?
The first two arguments can be relatively easily dispatched.
In the short term more planned borrowing might have been needed, but it would clearly be able to impact GDP positively. It would simply be finding ways to put the stabilisers on before the crash (or rather, during the crash!) rather than immediately afterwards, as the government is now having to do. The precise level of fiscal ‘fill’ this might require is dependent on the multipliers of the spending undertaken.
Second, there is very little evidence of the price of debt increasing significantly, and this is something that can be carefully watched. The invisible bond vigilantes will likely cough politely before substantiating.
The last argument, however, has real power. It is all too easy for the argument ‘Spend now, repay later” to become “spend now, spend later, repay only when compelled by events”.
Politically, too, such a position has the ability to cause real damage to any attempt to set out a ‘left’ fiscal conservatism.
It represents the intellectual power behind the Prime Minister’s line ‘why give the keys to the people who drave the car into the ditch?’
The first answer to this challenge has to be institutional.
William McChesney Martin1 once defined his job at the US Federal Reserve as “to take away the punch bowl just as the party gets going“.
This insight underpinned Gordon Brown’s decision to apply a golden rule to Britain’s fiscal policy, but it ultimately failed to work. The sirens of more spending sang so sweetly, the bounds were not tight, and the temptation to wriggle out of them too great.
Compare this with the decision to hand the ability to set interest rates to the Bank of England. The institutions did what they were intended to do, in terms of managing interest rates to meet inflation targets. Whatever else the left is attacked with now, the spectre of inflation with Labour was firmly killed off.
Even now, in the midst of a great economic challenge, the debate about whether to, and if so how, to adjust the mandate of the Bank of England, is conducted with an almost amazing restraint, at least among politicians.
Similarly, for a left Fiscal Conservatism to convince, it has to rely on an institutional, not merely political, structure to underpin our preparedness to approach fiscal policy in the same way.
This suggests the immediate challenge for left fiscal conservatives should in large part be about the design of effective institutional mechanisms to take the fiscal punchbowl away from a Chancellor, just as the economic party gets good.
On a nakedly political note, I think such an approach would place the self-styled fiscal conservatives of the right in an uncomfortable position.
If the left could offer a structual binding that guarantees medium-term fiscal consolidation when the economy grew, the rights exposure of the fiscal failings of current austerity would raise much more dangerous questions for the government than they currently do.
Wouldn’t it be sweet too, for the Labour frontbench to be able to confidently assert their fiscal virtue against the profligacy and spendthrift ways of those dangerous Tories?
We are after all, a very puritanical sort of party.
- the original titular happy puritan [↩]