Arse about tit Fiscal Conservatism

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.

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  1. 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 []

7 Responses to “Arse about tit Fiscal Conservatism”

  1. Braven

    This NFC idea relies too much on the ability of ‘experts’ to forecast trend GDP and to be able to identify where the economy is within the cycle. Even with an enormous team of economists and statisticians we really struggle to accurately say what GDP was over the last 5years, let alone what GDP growth will be over the next decade.

    Economists don’t even try to predict market interest rates. I don’t see how any NFC pronouncements on fiscal sustainability could have any credibility. It also presupposes regulators and experts to be immune to the economic cycle, which is demonstrably not the case.

    All that we’ll see is a group of well paid technocrats make highly procyclical mistakes that effect everyone but themselves without taking any responsibility, viz Mervyn King, Hector Sants and Adair Turner, etc.

    Reply
    • Hopi Sen

      It’s a reasonable po0int, but I’d encourage you to look at the OECD/IMF work here.

      The evidence is not that NFCs are perfect (They’re clearly not, for many of the reasons you state) but that they perform better than not having them.

      Reply
      • Braven

        Do you have a reference or link that you would suggest?

        I am sceptical of an empirical claim of their efficacy given how few independent data points there can be (ie to judge fiscal sustainability you need at least a decade, so at most the UK has ~6points) and I have a strong feeling the data set will predominantly cover developing countries that rely on external borrowing.

        Reply
  2. Jon Clarke

    How would you see Public Sector pay fitting into your National Fiscal Council landscape?

    Reply
  3. Dan Filson

    I like the tarpaulin in a storm quip, throwing back at the Tories their simplistic Roof repair metaphor ( and I don’t to be told Gordon Brown first used it). The real problem is, as with British weather, defining when exactly the sun is shining! Economic growth is not of itself the moment the sun is shining; it’s when you have BOTH economic growth AND are veering into budget surplus or actually there.

    So to resume government spending in any meaningful way would at this stage have the potential simply to worsen the deficit and the debt (I’m old enough, unlike many Coalition ministers, to know the difference). We need to be at the point where economic growth is generating a virtuous circle of rising tax receipts, rising well above the inflation rate and the GDP growth rate.

    Yet I do advocate major new spending on the national infrastructure combined with restraint on revenue sFirstly it does have a multiplier effect (something the Gocernment no more grasps than basic Keynesian economics). Secondly it cuts the benefits bill. Third it restores the psyche of the nation by reducing the gloom of a high unemployment nation and Instilling the prospect of hope.

    It is astounding the Coalition has not been nailed for the unprecedented growth in the National Debt. Could any other party survive one month having having increased the National Debt by more than half in less than the term of one term of office?

    There may be rocky times ahead if a small nation gets into trouble with its creditors – we too could face a sharp rate rise, thus proving if it was not already obvious that it’s not the Bank of England that ultimately controls interest rates but the cynical and something less than understanding markets.

    Reply
  4. Edward Barrow

    Seems to me that the problem is: economy growing, tax receipts falling – because growth is at the extremes, lots more low-income, low-tax workers and continuing growth of income at the top end. We come back to the unresolved structural problem of inequality. That the 1% pay 26% of income tax is a symptom of inequality, not an indicator of excessive taxation at the top end. The resolution must involve some increase in taxation because the fiscal alternative, austerity, just widens inequality. I would like to see any increase in tax allowances balanced by a fiscally neutralising increase in tax rates.

    On the national debt increase, any other party would have increased it more because all were planning looser fiscal positions, so although it is shocking it isn’t surprising. Also worth bearing in mind that about £375bn of the total £1.4tn national debt is held by the Bank of England as a result of QE.

    Reply
  5. Andreas Paterson

    On the question of whether to tighten I’m against it, and it’s not just that it’s “never a good time to show fiscal restraint”. Instead I’m looking at inflation, bond rates and wages all of which seem to be growing very very slowly. Looking at things through the IS-LM lens, I take low interest rates as a sign that the IS curve can move a fair bit to the right before we need to think about curbing government spending.

    As far as the fiscal council goes, I’m not averse to the idea, it might add a bit of honesty to political discussion of the economy. However, I think we have to be careful as to how much power it gets given. I also think it should be possible for elected politicians to defy such a council in certain circumstances.

    Reply

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