Osborne is mistaken to apply Victorian values to fiscal policy

Published June 15, 2015
Campaigners from the Robin Hood Tax Organisation dressed as bankers, 
including one wearing a mask representing British Chancellor of the Exchequer George Osborne, hold placards as they pose outside Mansion House, backdropped by the Bank of England at left, in London, June 10. The group say their idea for a robin hood tax is a tiny tax on the financial sector that could generate billions of pounds annually to fight poverty and climate change. The stunt was held by the group to coincide with Osborne’s annual economi
Campaigners from the Robin Hood Tax Organisation dressed as bankers, including one wearing a mask representing British Chancellor of the Exchequer George Osborne, hold placards as they pose outside Mansion House, backdropped by the Bank of England at left, in London, June 10. The group say their idea for a robin hood tax is a tiny tax on the financial sector that could generate billions of pounds annually to fight poverty and climate change. The stunt was held by the group to coincide with Osborne’s annual economi

GEORGE Osborne is a radical politician. The chancellor’s new plan to legislate fiscal surpluses is an attempt to return Britain to Victorian values. He has even revived the Victorian Commissioners for the Reduction of the National Debt (a body that last met in 1860).

This is an extension of the platform to which the government ascribes its recent electoral victory: the crisis was due to Labour’s fiscal profligacy when it was in office. The opposition cannot be trusted unless it admits its guilt and promises to follow Mr Osborne’s guidelines. Social democracy would be neutered, forever.

Why legislate? The same question arises with respect to the planned law not to raise the main rates of income tax, national insurance and value added tax until 2020. The answer is that these laws are a political ploy. If the government is to achieve an overall fiscal surplus and taxes are not to be raised, then spending must first be cut, and then kept at a level, relative to gross domestic product, achieved only twice in the past 70 years. If Labour supports the Conservative laws, it embraces a relatively small state forever; if it opposes them, it is condemned as a tax-and-spend profligate.

This, then, is a political trap. How clever it turns out to be depends on whether enough voters believe the ideas make sense. So do they? I think not.

One argument is that the crisis proved the need for surpluses in normal times.

Yet, as I wrote before the election, it would have made little difference to the outcome of the crisis if Labour had run a balanced budget before it. Consider Ireland and Spain. Both started with fiscal surpluses and very modest levels of public debt. Yet the financial crisis devastated both these economies.

Another argument is that the strong recovery of the UK economy proves fiscal policy is not needed. So abandoning fiscal flexibility would be no loss.

Yet the truth is that the UK recovery has been very weak. The return to pre-crisis levels of real GDP per head has taken two years longer even than in the Great Depression. This is so even though, quite wisely, the UK’s structural fiscal tightening was allowed to slow sharply after 2011-12.

A third argument is that a fiscal surplus is a hallmark of prudence. Yet the focus on public debt alone is mistaken. Crucially, it ignores the asset side of the balance sheet altogether. Moreover, other things being equal, the bigger the fiscal surplus, the lower interest rates would be. If that encouraged a run-up of private debt, the economy might end up yet more unstable. Alas, the Office for Budget Responsibility already forecasts a big jump in household debt.

A better argument would be that, even if fiscal profligacy neither caused the crisis nor created difficulty in managing it (as low real and nominal interest rates show), public debt must now fall relative to GDP. That would restore the ‘fiscal space’ used by the rise in net public debt from 37pc of GDP in 2007 to 80pc today.

This view is strengthened by the fact that debt imposes an economic burden. As a new International Monetary Fund paper states, that reduces the return on public investment. Yet, it also says the costs of policies aimed at lowering debt might still exceed the insurance benefits of less debt. Debt should be cut, it concludes, through growth or when exceptional revenues accrue. Also note that a fall in debt relative to GDP does not demand surpluses anyway. If nominal GDP grew at 4pc a year, then a deficit of, say, 1.5pc would reduce today’s ratio significantly, over time

Naturally, such considerations - including the case for fiscal stimulus - apply only if a country has fiscal space. Whether one does so is a matter of judgment. But markets and the IMF agree that the UK has such space. Supporting this view is the fact that the ratio of public debt to GDP remains well below its average of the past three centuries.

It is hard to know whether Mr Osborne really intends to make delivery of an overall fiscal surplus his overriding objective in this parliament. After all, he did not deliver his initial objectives in the last one. It is clear, however, that the obsession with public debt is unhealthy. Public borrowing is not always an evil. Nor is private borrowing always a good. It is quite appropriate to borrow to invest. Not least, the time to reduce public debt comes when economies boom and interest rates are far from the floor.

The trap set by the government can be avoided by explaining that a surplus is not the main goal. More important is the nature, strength and durability of recovery. Important, too, is how fiscal consolidation is achieved and at whose expense. Legislation of fiscal surpluses is unnecessary and unwise. So ignore it.

martin.wolf@ft.com

Published in Dawn, Economic & Business, June 15th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play

Opinion

Editorial

Judiciary’s SOS
Updated 28 Mar, 2024

Judiciary’s SOS

The ball is now in CJP Isa’s court, and he will feel pressure to take action.
Data protection
28 Mar, 2024

Data protection

WHAT do we want? Data protection laws. When do we want them? Immediately. Without delay, if we are to prevent ...
Selling humans
28 Mar, 2024

Selling humans

HUMAN traders feed off economic distress; they peddle promises of a better life to the impoverished who, mired in...
New terror wave
Updated 27 Mar, 2024

New terror wave

The time has come for decisive government action against militancy.
Development costs
27 Mar, 2024

Development costs

A HEFTY escalation of 30pc in the cost of ongoing federal development schemes is one of the many decisions where the...
Aitchison controversy
Updated 27 Mar, 2024

Aitchison controversy

It is hoped that higher authorities realise that politics and nepotism have no place in schools.