Must-Read: Martin Sandbu: Free Lunch: Iron Rule from No 11?
Must-Read: Does Britain’s Tory government listen to no advice from technocratic economists at all?
Free Lunch: Iron Rule from No 11?: “George Osborne announced… not satisfied with outlawing higher tax rates…:
…he now promises to make the government legally obliged to run absolute budget surpluses…. We must distinguish between two questions: are rules in general a good idea and is Osborne’s proposed rule the right one? Neither question can easily be answered with a Yes…. If the politics favour short-term gains without due regard to long-term costs, policy makers acting without constraints are tempted to pursue policies everyone agrees are bad…. At the same time… fiscal rules unjustifiably constrain the range of political alternatives that should be on the democratic menu. Whether they do depends on the precise content of the rule.
What about Osborne’s?… There is an illuminating logical flaw in Osborne’s own argument. He said: ‘Without sound public finances, there is no economic security for working people … the people who suffer when governments run unsustainable deficits are not the richest but the poorest… therefore, in normal times, governments of the left as well as the right should run a budget surplus to bear down on debt and prepare for an uncertain future.’ One can agree with both premises–but the conclusion depends on whether sound public finances and sustainable deficits require running a budget surplus and bearing down on the debt. And there are good reasons to think otherwise. In a normal economy, the government can run moderate deficits permanently while keeping debt a constant share of GDP–surely the very definition of sustainability. As for the level of the debt, how much is ‘sound’? Surely soundness is related to the net wealth of the government and not simply the gross financial debt…