In the fourth of the CPS' 'UK Policy Resolutions for 2012' series, Ryan Bourne, Head of Economic Research at the Centre for Policy Studies, looks at solutions for sustainable spending that could begin in 2012. Yesterday, in the third in the series, Esher and Walton Conservative MP Dominic Raab looked at regulatory reforms that could create jobs in the coming year.
UK Policy Resolutions for 2012:
Though supportive of the Government’s initial strategy to eliminate the structural budget deficit by 2015, any fiscal conservative should have been concerned with the rhetoric. Not only did the Coalition exaggerate the scope of the cuts, but they initially gave the impression that having reached their targets, all would be well as we entered the next Parliament. Indeed, many commentators laid out Osborne’s plan as: ‘to reduce the deficit, then go to the electorate offering tax cuts.’
Osborne now has little hope of achieving his initial target, and has jettisoned his deficit reduction rule in favour of a spending one: to keep spending at levels laid out in the CSR, hope for more growth than forecast to close the structural deficit, and if this doesn’t materialise, commit to further austerity into the next Parliament.
I think this is a mistake – and would prefer him to stick to his original target.
But even if this was met, it would not have been the end of our fiscal pressures. The commendably independent Office for Budget Responsibility’s first Fiscal Sustainability Report showed that our ageing population, among other factors, means government spending net of debt interest would rise by 5.4 per cent of GDP to 2060-61 on unchanged policy. This would see public sector net debt rise to 107 per cent of GDP. And these calculations assumed George Osborne met his targets and public sector productivity was favourable.
Debt at this level would prove a severe hindrance to growth. It therefore is of great importance that all Governments are in future more fiscally responsible and that scope for the ‘political business cycle,’ whereby deficits are expanded prior to election, is limited. As Buchanan and Wagner stated way back in 1977, commitments to Keynesian-style policies exacerbates the tendency for fiscal indiscipline inherent in democracies, because politicians increase public spending in recessions but are not willing to tighten fiscal policy in a boom.
Given the fiscal pressures we will face, the evidence that smaller states result in higher growth, and the need to prevent politicised demand management, many have advocated the use of fiscal rules to constrain government expenditure.
But how would these work in practice? Even where they have been tried: think Maastricht and Gordon Brown’s ‘Golden Rule,’ they have been subverted, ignored, or misrepresented for political gain. While the US stalemate this summer showed that the mere existence of a debt ceiling means that deficit spending is much more closely scrutinised – rigid rules can clearly limit flexibility.
It therefore seems unlikely that statutory rules are unequivocally desirable. But this doesn’t mean that governments should not set out plans for fiscal responsibility.
UK POLICY RESOLUTIONS FOR 2012
The Coalition has made some positive strides in this regard. But in 2012, the public expenditure transparency agenda should be expanded further, alongside zero-based budgeting for departments and a commitment for any of the proceeds from bank shares to be used to pay down the national debt.
I’d like to see them go further to ensure confidence in our public finances - committing themselves to a government spending rule for the whole of the next Parliament. A nominal spending growth cap of the MPC’s inflation target plus 1 per cent (3 per cent), after the current five-year rolling period, would ensure that any spending cuts are locked in and would put the UK on a downward trajectory for government spending as a proportion of GDP.
This would give the economy an excellent chance of rebalancing – as nominal GDP growth would almost certainly outstrip government spending growth. Assuming the forecast average nominal GDP growth rate for the rest of this Parliament (4.7 per cent p.a.) continues into the next Parliament, this rule would reduce Government spending as a proportion of GDP to 37 per cent by 2019-20. If higher, this would be closer to 35 per cent. What’s more, the rule would encourage the Government to support a low inflation policy from the Bank of England’s Monetary Policy Committee to give fiscal breathing space.
The public sector saw an extraordinary growth of real spending over the New Labour period of office. To protect the British public from this fiscal irresponsibility in future, both Coalition parties should commit themselves to this moderate medium-term spending rule that will keep the public finances under control. An announcement in 2012 would not only provide certainty for Government departments to allow longer term planning, but it would put pressure on the Labour party. They would face a tough decision: either signing up to the rule to highlight their fiscal credibility, or having to explain why they wouldn’t support it.
Ryan Bourne is Head of Economic Research at the Centre for Policy Studies and in 2011 authored the publication ‘Adrenalin Now: Targeted, popular tax cuts to boost the economy’. For his work on advocating tax cuts, the received the YBF Eric Forth Award.
This article represents the views of the author only and does not necessarily represent the policy outlook of the Centre for Policy Studies, its board, staff or affiliated members.
Tomorrow, Conservative MP Charlie Elphicke looks at help for small and medium size-enterprises in 2012.