Running fiscal plans five years in advance doesn't workby Anatole Kaletsky / March 18, 2015 / Leave a comment
Say one thing, then do the opposite—and get the credit for both. This rhetorical technique, sometimes attributed to Bill Clinton or Tony Blair and dubbed “triangulation,” goes back at least to the Sophists and could probably be traced to the earliest origins of politics, millennia before. George Osborne, in all five of his Budgets, culminating in today’s pre-election performance, has proved himself a master of this art.
Ever since the 2010 “emergency” Budget which supposedly saved Britain from Labour-induced bankruptcy, reactions to Osborne’s policies have followed a perfect pattern of triangulation. First Osborne wins praise for his unbending determination to balance the government’s books and cure Britain’s debt addiction. Then the nation gives thanks for his pragmatism in refraining from deeper austerity after he misses his targets. Next comes more acclaim for Osborne’s courage in setting tough new targets, followed by further relief when he spares voters from more punishment as his new objectives turn out to be unattainable—and so on. This is the quality praised by the Financial Times in its pre-Budget editorial as the Chancellor’s “inner malleability that belies his unbending manner.”
The general election will depend largely on whether the 2015 Budget marks the ultimate apotheosis of Osborne’s triangulation or finally exposes this political trick. Opinion polls suggest that economic judgements about fiscal responsibility, balanced budgets, spending cuts, austerity and so on will be decisive. But these questions of economic management can be addressed in two different ways.
The normal formulation is the one implicit in Osborne’s Budget:
“How will the government reduce deficits and public spending, thereby avoiding national bankruptcy and laying the foundations for decent economic growth?”
But the same question could be asked the other way round:
“What should be the government’s priorities in managing public spending and in collecting whatever taxes are needed to finance sustainably a post-Thatcher welfare state under conditions of decent economic growth?”
Depending on which question is asked voters have totally divergent views about the party that offers better answers. The Tories are seen as prudent stewards of the national finances, so when the question is posed in terms avoiding profligacy and averting national bankruptcy, they win hands down. But if voters believe the economy and public finances are stable and are then asked about priorities for managing government finances, they mostly side with Labour’s more statist values and prefer the government to maintain public spending, rather than cut taxes.
Osborne’s consummate political achievement has been to focus all “serious” economic debate on the first formulation, by claiming that the government must stop borrowing to avert a supposed threat of national bankruptcy. As a result, the Chancellor has been able to present himself not only as the saviour of the Treasury but also as the guardian of whatever shrunken welfare he deems to be affordable within his budgetary targets.
Farage: we’d only support a “responsible” budget
Give voters the state they want
Yet the Treasury targets are anything but “serious.” Not only have they been repeatedly and egregiously missed throughout the past five years with no adverse economic or fiscal effects, but we can be sure that they will be missed again in the next parliament, although the direction of the error by 2020 is harder to predict. There are many reasons why deficits five years ahead are impossible to forecast and pointless to target. Budget deficits represent a small difference between two huge numbers (for public spending and taxation,) which in turn are influenced by many unpredictable factors. The reductions in public spending assumed in Budget forecasts are often illusory or politically infeasible. When there is no market pressure or economic rationale for hitting arbitrary fiscal targets, policy adjustments are unlikely if these targets are missed. And most importantly, deficit reduction is usually self-defeating in an economy where interest rates are near-zero, for reasons clearly described by Keynes 80 years ago.
Why then is British politics still dominated by these meaningless “long-term” fiscal plans? For the Tories this obsession is obviously welcome, since it supports Osborne’s triangulation and offers an excuse and a cover for the ideological commitment to reducing the size of the State.
Meanwhile Labour has been brow-beaten into accepting the nonsense of long-term fiscal plans after the failure of Ed Balls’s initial attacks on Tory austerity. Labour’s failure, in turn, reflected an inability to understand the greatest triumph of Osborne’s triangulation: the 2013 Budget, which restored economic growth by providing the biggest subsidies in history for household borrowing under the slogan, “We cannot cure debt with more debt.”
Finally, independent policy analysts such as the Office of Budget Responsibility and Institute for Fiscal Studies feel obliged to take long-term fiscal blueprints seriously, even though they know full well that these targets and deadlines are completely arbitrary and there is no particular reason to expect any government, whether Tory or Labour, to stick to a pre-ordained fiscal path. These “non-political” auditors, by refusing to challenge the political-charged assumptions embedded in Treasury fiscal targets, thus confer a spurious objectivity to essentially partisan judgements about the appropriate size of the State.
Imagine what would happen if, instead of telling voters that government must balance the budget by some arbitrary date, the Treasury tested markets to see how much it could borrow without driving up interest rates or creating excessive inflation. The electoral system could then ask voters what size of state they wanted and the government could ask economists how best to raise the taxes needed to pay for this level of spending, over and above available market borrowing.
In this ultra-rational world the markets would tell the Treasury to expand its borrowing somewhat above the present level of £80bn, preferably to finance some extra public investment, and then to keep borrowing at about the same rate throughout the next parliament, until changes in macroeconomic conditions suggested the need either for fiscal stimulus or fiscal restraint. Voters could then decide on the size of the state quite independently of borrowing objectives, possibly supporting parties that would leave spending roughly unchanged relative to the economy, but reallocate some money to health, education and perhaps transport. Finally the structure of taxation could be referred to economists, who would probably recommend keeping the total tax-take about where it is today, but shifting more of the burden from incomes to energy and housing.
This may all sound very boring. But this kind of careful segregation of budgetary imperatives from political ideology would produce a much more realistic and constructive economic debate than anything heard in Britain under the present government—or likely to be heard in the election to come.