After next week’s budget he should focus on Osborne’s big mistakes—there are lotsby Tony Yates / March 10, 2016 / Leave a comment
John McDonnell, Shadow Chancellor, has launched a national seminar series, ostensibly a conversation about a “New Economics.” This effort will not have had any time to bear fruit before George Osborne delivers his 2016 budget next week, and McDonnell has to respond. Fortunately, there is no need for a “new economics” since the old economics suffices perfectly well to frame a discussion of the nation’s economic challenges.
The case against the Government’s fiscal surplus rule must be made, and a more effective alternative proposed. The rule commits the government to producing a budget surplus by 2019/20, and to keeping the budget in surplus unless growth falls below one per cent. There are some echoes of sound economics in the rule. These need to be recognized in order to understand what a much better, credible fiscal framework would look like.
The first echo is that it is a rule. Properly designed, such commitments can be the thing that allows the government to use fiscal policy vigorously, when needed, without scaring the bond markets. Second, the rule makes the point that fiscal policy needs to be more relaxed when the economy is weaker. Most of us agree on that. Third, the rule confronts the task of weighing the competing priorities on fiscal policy: the need to repair finances so that when a future crisis hits the taps can be turned on again, versus the need not to derail the recovery now.
However, the rule clearly strikes the wrong balance for the circumstances the economy finds itself in today, and no doubt will do so again in the future. The routs in global financial markets have highlighted the risks that the UK is running with its current mix of monetary and fiscal policy. With interest rates close to their floor of zero, and further quantitative easing of dubious worth, a moderate fiscal stimulus would allow for higher interest rates, and leave the Bank of England more room to loosen policy…