At this year’s Fabian New Year conference, the pollster Deborah Mattinson described eloquently the economic policy problem facing Labour. She described the public’s reaction to our policy ideas: ‘That’s fine but how are they going to pay for it?’ Before we can begin to communicate our vision for Britain, we need to deal with the money question.
This analysis fits with the brilliant positioning paper In the Black Labour published by Policy Network at the end of last year. It argued coherently that only by adopting the policies and language of fiscal conservatism can we even begin a discussion about how to reform public services. Otherwise any common-sense policy ideas will just not get through.
Now’s the time to move this debate on. My argument is that it is the left in Britain that should now be starting a debate on balanced budgets. We should feel no shame in using that language, despite its link to US fiscal conservatism, because we need to be credible in demonstrating our ability to keep spending under control. Because it will then give us more scope to pursue radical and redistributive reform agendas within the overall financial envelope we set.
The Conservative-led coalition made the mistake of setting themselves an absolute target of the amount of savings they wanted to make. In doing so, they had to talk the language of cuts, and so choked off the economy, restricting their room for manoeuvre even further.
Having a balanced budget is commonly understood to mean that expenditure does not exceed income. However, since that would make it impossible to pursue countercyclical policies in a recession, no country operates in that way in practice.
Germany’s constitution was revised in 2009 to cap the permitted level of structural deficit to 0.35 per cent of GDP, but this requirement is waived in a recession. Switzerland requires the ‘structural’ budget to be in deficit. The use of the word ‘structural’ means that additional spending is permitted when the economy is not operating at full capacity. Spain has committed to setting limits to structural deficits by June 2012.
Most US states have a requirement to pass a balanced budget of their discretionary operating budgets, without reference to capital budgets. But there is little enforcement if the forecasts are missed. A 2009 IMF survey of 81 countries, including OECD members, found not one country had a balanced budget requirement that had no adjustment for economic cycles or capital investment.
Capital or revenue?
The first policy question is whether a balanced budget rule should apply to capital or revenue: On the presumption that capital spending raises future revenue, it would be sensible to exclude capital spending from a balanced budget requirement. This point could be reinforced if all capital projects were subject to an external and credible value-for-money assessment to ensure they raised future economic growth potential.
Annual or cyclical?
The previous Labour ‘golden rule’ was to balance revenue expenditure over the cycle. However, the flaw with this is that the point in the cycle is not known when the budgets are set and it is often not clear for some years when a new economic cycle starts; retrospective changes to the analysis of this reduces credibility. Similar practical problems exist with targeting structural deficits, or attempting to achieve structural balance.
The most credible commitment is to commit ourselves to running a surplus when the economy is growing, and use it to pay down debt – and in time to build up savings. We should start a loud debate now as to how much should be saved at different levels of economic growth; should it be very substantial for example if the economy is growing above trend and less if it is only sluggish growth? Is there a formula here that would work?
The advantage of all of this is that it is easy to understand – it’s akin to paying off more of your mortgage (or saving for a rainy day) when you are in work. It also runs to the heart of what critics say was wrong with the financial boom: the economy was growing but we still ran a (small) deficit. We’ll know when we have got it right, because the public will stop talking about it as an issue.
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Kitty Ussher is a former economic secretary to the Treasury and is research fellow at the Smith Institute
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Kitty says: “The most credible commitment is to commit ourselves to running a surplus when the economy is growing, and use it to pay down debt – and in time to build up savings. ”
Surely it’s more credible to commit to pay down debt when net government income is predicted (by OBR) to grow and to have a sliding scale (pay down more with higher growth).
And while we’re it at, we need to get past neo-liberal fundamentalism.
So let’s commit to pay down debt when net income is predicted to grow AND the happiness index has grown.
Agree on need for oversight of capital expenditure – Labour lost some credibility by not managing to project manage some of the bigger projects correctly. Same applies to procurement.
Will someone please point out that when the UK’s infrastructure was neglected for over 30 years it was necessary to spend even during a ‘boom’ because infrastructure renewal couldn’t be put off any longer (at least by any responsible government).
Also, I don’t like the idea of doing anything by formula – these rules of thumb tend to be given normative rule status – if we don’t have judgement we might as well be ruled by machines (or idiots).