The Government's Fiscal Responsibility Bill

November 17, 2009 2:44 PM

I've written an article for the Adam Smith Institute, setting out why the Fiscal Responsibility Bill is a pretty poor substitute for actual fiscal responsibility:


"The idea of this government locking in Fiscal Responsibility with a new law would be laughable if their current irresponsibility wasn’t mortgaging our future. At the moment, Britain has the second highest structural deficit in the developed world. The OECD estimates that, to put our debt back on a sustainable basis, we would need a fiscal tightening of 12.8 per cent of our national income. That is a nearly unthinkable £150 billion of spending cuts or tax rises just to get debt as a percentage of GDP down to 60 per cent, still much higher than just a few years ago.


That massive structural deficit exists despite taxes rising over the last ten years, with increases in stamp duty and national insurance for example. And, despite the Government having fiscal rules that they claimed were rock solid at the time. There were two problems that drove the failure to properly control spending. First, spending was conflated with commitment to delivering quality services, when more sustainable improvements could have been delivered by focusing on getting the best value with scarce resources. Second, with the Government purporting to have abolished “boom and bust” the windfall from an unsustainable boom was treated as a permanent improvement in our economic fortunes and that meant fiscal policy was formed in an utter fantasy land with no provision made for harder times.

If this Government or any future government are serious about fiscal responsibility they should do two things. They should first make serious cuts in public spending: a report we produced with the IoD set out £50 billion of potential cuts. That would be a good start. After that, they should put in place explicit expenditure targets, as the OECD recommends, so that spending can be further brought down to a sustainable level. Studies by both the EU Commission and the IMF have shown that reducing expenditure leads to more sustainable results in stabilising debt.

The ultimate control on excessive spending can’t come from rules and laws, though. It has to come from parliament. That’s why a complete plan to permanently address the current crisis in the public finances and prevent it recurring has to address the need for broader democratic renewal. A series of changes – like primaries to select and reselect party candidates – to make MPs more accountable to their constituents than their party leaders would mean a more meaningful check on policy and reduce wasteful spending.

Serious, credible action is needed to forestall a further crisis in the public finances. But this new law is nothing of the kind."

I've written an article for the Adam Smith Institute, setting out why the Fiscal Responsibility Bill is a pretty poor substitute for actual fiscal responsibility:


"The idea of this government locking in Fiscal Responsibility with a new law would be laughable if their current irresponsibility wasn’t mortgaging our future. At the moment, Britain has the second highest structural deficit in the developed world. The OECD estimates that, to put our debt back on a sustainable basis, we would need a fiscal tightening of 12.8 per cent of our national income. That is a nearly unthinkable £150 billion of spending cuts or tax rises just to get debt as a percentage of GDP down to 60 per cent, still much higher than just a few years ago.


That massive structural deficit exists despite taxes rising over the last ten years, with increases in stamp duty and national insurance for example. And, despite the Government having fiscal rules that they claimed were rock solid at the time. There were two problems that drove the failure to properly control spending. First, spending was conflated with commitment to delivering quality services, when more sustainable improvements could have been delivered by focusing on getting the best value with scarce resources. Second, with the Government purporting to have abolished “boom and bust” the windfall from an unsustainable boom was treated as a permanent improvement in our economic fortunes and that meant fiscal policy was formed in an utter fantasy land with no provision made for harder times.

If this Government or any future government are serious about fiscal responsibility they should do two things. They should first make serious cuts in public spending: a report we produced with the IoD set out £50 billion of potential cuts. That would be a good start. After that, they should put in place explicit expenditure targets, as the OECD recommends, so that spending can be further brought down to a sustainable level. Studies by both the EU Commission and the IMF have shown that reducing expenditure leads to more sustainable results in stabilising debt.

The ultimate control on excessive spending can’t come from rules and laws, though. It has to come from parliament. That’s why a complete plan to permanently address the current crisis in the public finances and prevent it recurring has to address the need for broader democratic renewal. A series of changes – like primaries to select and reselect party candidates – to make MPs more accountable to their constituents than their party leaders would mean a more meaningful check on policy and reduce wasteful spending.

Serious, credible action is needed to forestall a further crisis in the public finances. But this new law is nothing of the kind."

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