From the TUC

Baselines and Fiscal Rules: The Divergence of Politics & Economics

07 Jan 2014, by Guest in Economics

According to the Chancellor’s biographer Janan Ganesh, George Osborne believes in a ‘baseline theory’ of the politics of fiscal policy. Andrew Sparrow yesterday placed the Chancellor’s grim New Year’s speech in this context and quoted Ganesh:

Whatever the government’s overall fiscal plan going into an election, so this goes, it will be treated by the media and voters as the baseline, or common sense position. Any proposed deviation from it by the opposition will be scrutinised remorselessly. If it is a Labour opposition proposing to veer off a Tory government’s baseline, this will be presented as a plan for tax rises. John Major’s devastating campaign against Neil Kinnock’s ‘tax bombshell’ in 1992 was just such an example. If, on the other hand, it is a Conservative opposition proposing to deviate from a Labour government’s baseline, this will be equally vulnerable to attack as tantamount to spending cuts. 2001 was proof of this, and so was 2005. 

I suspect that over the next 18 months or so we will see a grand test of this theory as the politics and economics of fiscal policy diverge.

The reason that the baseline theory is about to endure a severe stress test is that the current baseline looks implausible.

The IFS have been pointing this out for quite a while – the scale the departmental or social security cuts required to hit the £25bn target (especially if pensioner benefits are protected and tax rises basically ruled) make them almost literally incredible.

I’m not saying they cannot be delivered. But I am saying that delivering them would require the government to completely absent itself from services it currently delivers or to cut back on support for the disabled, children and the working poor.

In short, delivering cuts on this scale (in this short time period) would mean a fundamental change in the size, role and structure of the British state. A change that has not been subject to much debate.

But, as I am always keen to point out, nothing is set in stone. As Director Paul Johnson has written in the Guardian:

There is nothing magical about the chancellor’s fiscal rules. And even to meet them he doesn’t need the additional squeeze announced in the autumn statement for 2018-19. But the state of the public finances is such that there is no getting away from some further fiscal squeeze over the period of the next parliament.

Serious discussion about how much of a squeeze, the balance between taxes and spending, and the choices within spending should be the stuff of political debate over the next 18 months. Nobody should be pretending that any of the choices will be easy.

This is where the serious discussion in economic circles is to be found – on the nature of the fiscal rules themselves (What is the target? What is the time frame? What is the balance of tax and spend?).

I think that it is possible to design fiscal rules that work for the long term. A good start would be to target something that can be measured rather than estimated (debt/GDP rather than the structural deficit would be my starting point) and set a timetable that is sufficiently long term to allow flexibility in the face of the economic cycle and unexpected global shocks.

Personally I think aiming to get debt/GDP to, say, 65% by 2025 with the OBR providing regular updates on progress wouldn’t be the worst idea imaginable.

Others might argue that 2025 is too long term or that the structural deficit is in fact a better measure. I think more can be done on the tax side, others disagree.

I’m more than happy to listen to, consider and debate these points. But I would much rather be involved in a debate about the correct fiscal framework than arguing instead about how to achieve a £25bn fiscal consolidation by an entirely arbitrarily chosen date.

In the coming 18 months we shall learn if the baseline theory does indeed hold – can the current fiscal plans really be accepted as a ‘a common sense position’ if they imply a fundamental change in the nature of the British State and many economists consider them unachievable?

Time will tell.

2 Responses to Baselines and Fiscal Rules: The Divergence of Politics & Economics

  1. gastro george
    Jan 7th 2014, 5:18 pm

    An incredibly political area. Miliband and Balls desperately need to avoid letting Osborne set the framing of the economic debate – which is exactly what he is trying to do. Is this a possible way out for Balls? Rather than contesting Osborne’s narrative, can he set his own – by proposing an alternative, “debt”/GDP, target as you suggest? It would allow them more emphasis on a growth agenda. But would it get him off the hook with the media (which is pretty much analysis-free at the moment)?

  2. Tanweer Ali
    Jan 9th 2014, 7:19 am

    Regarding the last comment, I agree that the Labour Party needs to frame the debate, which they have not yet managed to do. I am afraid, though, that they will need to produce a whole new ‘story’. I am not convinced that focusing on a debt/GDP target will do the trick with the public.

    As for the baseline theory, I wonder how this is supposed to play out when there is not one party of government but two – the other of which openly describes the Chancellor’s plans as ‘extreme’.