Fiscal rules are dead: long live fiscal policy

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I missed this when Chris Giles wrote it in the FT last week:

For over two decades, the UK has operated its budget within formal constraints on the level of public debt. Alongside a headline fiscal rule regarding the budget deficit, supplementary backstops have limited the rise in public debt as a share of national income, now 82.2 per cent. Currently, the rule sets a target for public sector net debt as a percentage of gross domestic product to be falling in 2020-21. This debt rule has outlived its usefulness and needs to go.

I am aware that I have an inclination to think that if Chris Giles says something it is likely to be wrong, but on this occasion we entirely agree. I have long argued that fiscal rules make no sense whatsoever, since they prioritise bookkeeping over true economic policy. This is why I have, for so long, criticised Labour's Fiscal Rule. I do, then, for once have to say that Chris Giles is right.

But it is more than that: there is a sense that the mood is changing. Fiscal rules were part of monetary policy, intended to limit the capacity of the state to undertake action to intervene in the economy to correct for market failure and deliver well-being for the population of the country at large that the market was unable to create.

We now know that markets cannot deliver the solutions that are required.

And we know that monetary policy has, in effect, failed because effective interest rates have been at or near zero percent for a decade or more now.

The consequence is obvious: it is only through active fiscal policy that governments can now intervene to deliver the necessary policies to create change. When even Chris Giles realises that this is the case the mood has changed.

And with it, I would add, so too is sentiment on independent central banks changing: Thomas Palley has just written a paper arguing that this was always a charade, which in the UK, as a matter of fact, and by law, it always was since Chancellors always had the opportunity to overrule the Bank of England if they so wished. This change is also welcome: control of economic policy has to rest with democratically elected politicians: the idea that bankers could run the country in the interest of all was very obviously false, and we have paid a very high price for it.

I am not saying that Chris Giles changes anything: as far as I know he does not. What  I am saying is that he does indicate a mood swing that is welcome. The Green New Deal is all about the use of fiscal policy for the delivery of social, economic and political goals: this change in sentiment makes it easier to deliver a Green New Deal, and that has to be good news.