George Osborne's Mais Lecture

February 25, 2010 10:39 AM

Yesterday George Osborne delivered the Mais Lecture at the Cass Business School, you can read the full speech here.  He got many things right but there were some important flaws in his analysis and some areas where the Conservatives' plans clearly fall short at the moment.

First, the encouraging bits.  He cites some analysis from the Bank for International Settlement which reinforces the need for fiscal tightening:

"The BIS were amongst the few organizations who can credibly claim to have warned about the risks of a global financial crisis, and now they are highlighting the next source of risk.

As they argue, "persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term growth potential."

In the short term, governments should not be "lulled into complacency by the ease with which they have financed their deficits so far" - especially those with relatively weak fiscal frameworks and a high degree of dependence on foreign investors."


He also makes the same point that I brought up on this blog earlier in the week:

"Businesses and individuals look to the future, and while they are not the perfectly rational creatures assumed by the theory of Ricardian equivalence, uncertainty over the future paths of tax rates and government spending does play an important role in their behaviour.

[...]

So a credible fiscal consolidation plan will have a positive impact through greater certainty and confidence about the future.

Businesses can expand safer in the knowledge that an out of control budget is not going to lead to ever higher taxes.

Consumers can spend safer in the knowledge that mortgage rates will remain lower for longer."


There are other areas where we disagree.  He attacks the potential of fiscal rules:

"But there is also an emerging recognition in the academic literature that any system of rules is likely to be unsatisfactory - either so general as to be ineffective, or so complex as to be inflexible and impossible to enforce."


Recent reports from both the IMF and the OECD have found that a fiscal adjustment is more likely to be successful with fiscal rules in place.  The OECD report noted that rules were particularly effective when combined with embedded expenditure targets; the absence of a spending target might explain why the Government's rules haven't been effective in the last decade.  The next Government will need every possible tool to successfully confront the fiscal crisis, the Conservatives should take another look at the potential of fiscal rules.

And, this paragraph shows the limits of Conservative policy at the moment:

"The Budget will set out some of the cross-cutting measures on pay, the cost of Whitehall, the review of the pension age, and the largest public sector pensions, that will help to put our public finances on a sustainable footing."


While general cuts are important, and many of the measures Osborne mentions were included in our report with the IoD on how to save £50 billion, they also need to start identifying organisations and programmes that will be abolished.  Identifying specific budget lines to cut out is important to achieving political success, reducing overheads and curbing excessive regulation.

We'll be covering all these issues in our upcoming book, How to Cut Public Spending (and Still Win an Election).

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