Fiscal rules are not worth the paper they are written on

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The Guardian has a feature on a claim by the Resolution Foundation this morning, saying:

The thinktank warned in a report that Labour and the Conservatives are already on course to break their new fiscal rules, announced less than a month ago, as a result of pledges made in their manifestos and in leadership speeches.

The main parties have adopted tax and spending rules that commit them to balancing day-to-day spending over three years in the case of the Tories or five years in Labour's case, putting a limit on debt servicing costs and, in Labour's plan, improving the value of public assets over the course of the parliament.

The Foundation said that fiscal rules were important for the government's stewardship of the public finances, and testing its economic priorities.

They added:

However, it warned that fiscal rules “are only useful if they are credible and adhered to”. It added: “Failing to meet them at the first opportunity — as both main parties risk doing — would damage rather than enhance the UK's economic credibility.”

There are three things to say. The first is that the Resolution Foundation is, I think I am safe to say, the home of the dire economic strategy and fiscal rule promoted by Ed Davey for the LibDems that suggests that a government should run a permanent surplus, so restricting money supply and guaranteeing simultaneous austerity. Nothing that they say about Labour and the Conservatives should ignore this fact: bias is built into their comments.  Nor should the economic illiteracy that the Davey policy reveals be ignored if it does, as I suspect is the case, reflect the Resolution Foiundatiion view on these matters.

Second, a fixation with fiscal rules is simply absurd in an era when we know that a) there is a macroeconomy, which fiscal rules deny by adopting a household analogy b) money is created by governments and so they cannot be constrained by a shortage 0f it and c) the impact of fiscal rules has always been to constrain the role of government, impose austerity and to create unemployment as a wholly unnecessary and profoundly socially costly buffer against inflation in the interests of the wealthy.

Third, a fiscal rule is the type of measure a book-keeper would impose on the economic strategy of a country: they ignore what's really going on and instead suggest that the priority is keeping the ledgers nice and tidy. It is small-minded thinking, at best. Instead we need big thinking, the sort a finance director or CEO might do (and yes I am aware I am at risk of using a corporate analogy). The question is what would that be?

It would be to ask what the country wants to achieve, which I would always suggest would be full employment with net carbon usage and low inflation.

Then the finance question becomes one of how that can be delivered, which a combination of  modern monetary theory and some lateral thinking on savings, pensions and the role of government borrowing answers.

But there is no fiscal rule in this: there is finance as a servant to the real goals that a government wants to fulfil, and not the economy acting as a servant to finance.

The Resolution Foundation is putting finance first. Like the Institute for Fiscal Studies what it shows is that however good it is at micro issues it cannot do macro thinking, or as a result comment on macro policy. Before it does so again it really does need to do some basic in-house economic education because right now it's quite emphatically doing more harm than good, both to itself and others, with such commentary.

I'd start by noting that fiscal rules are not worth the paper that they are written on. Real economic and social goals are.

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