In this video, I explain why Rachel Reeves' beloved fiscal rules are nothing but political theatre. They're arbitrary, endlessly changeable, and stop us investing in what matters. It's time we governed for people, not ratios.
This is the audio version:
This is the transcript:
As you will know if you follow politics, Rachel Reeves spends all her time talking about the need for the UK to follow her fiscal rules. But there is one fundamental problem with her claim, and that is that there are quite literally no such things as fiscal rules. All they are, are a set of guidelines, created by her, that she wants us to comply with, to deliver what she has decided are the outcomes that she desires for our economy.
Let's break this down.
Labour and Conservative governments have created fiscal rules since 1997.
Gordon Brown created the idea in that year because he wanted to prove that the incoming Labour government was going to be financially responsible, because he thought that is why people hadn't voted for Labour over the previous 18 years.
Since then, we've had golden rules, sustainable investment rules, debt-to-GDP ratios, long-term targets, short-term targets, economic cycle targets, and all of them are different, and none of them have ever lasted. And that's because first of all, they've all been made up to suit the convenience of the current chancellor, whoever they might have been, and there have been quite a lot over that number of years, and they are only used to justify what the government wants to do anyway.
There is, in fact, no single correct level of debt or deficit in the UK. As a matter of fact, the UK issues its own currency, so it can never run out of money, and yet fiscal rules imply otherwise, and fiscal rules ignore that fact. And so they are based in themselves on a falsehood that there is a shortage of money when the truth is, there is not.
The consequence is that at their very heart fiscal rules are intended to achieve two goals. One is to prevent the government of investing in the things that we need, which is why we have an infrastructure crisis in the UK. And secondly, they're about cutting the level of government spending, which is what every government appears to have wanted to do since 1997, because they all buy into the neoliberal doctrine that government is bad, and the private sector is good, and that's what these rules are intended to do.
The fact is that fiscal rules pretend to impose discipline, but the truth is they're always suspended in a crisis, and they're always rewritten if the government can't meet the criteria they've set out in advance. In other words, these rules are about as flexible as a rubber band.
They are utterly useless as a mechanism for controlling the economy. They're just about creating current headlines.
And the consequence of them is that, at the end of the day, we have underfunded public services and rising inequality and governments who don't want to do anything about it.
So what do we need to do?
We need to ditch these artificial constraints.
We need to focus on real outcomes.
The target should be full employment, a proper transition for climate change, a focus on wellbeing, keeping people safe and secure and free from fear.
Those are what the real goals of the economy are, and yet we are putting in place arbitrary ratios, which are guiding economic performance, but not delivering any of those things.
This is not about democratic accountability. Rules can never be that. Fiscal rules don't build trust between the government and the electorate. Only delivery can. So, as a consequence, it's time to scrap the pretence. Fiscal rules are make-believe, and we should be governing on the basis of reality.
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A couple of my younger friends ( relative term ) say the ‘Rules’ are the product of the ‘national economy is like the household budget’ idea and a pitch for the Daily Mail vote.
Seems about right.
I agree. Fiscal rules are indeed political theatre, an election promise to appear responsible when you control close to half the national income. It’s possible as an idea that if central governments didn’t control all that spending, that politicians wouldn’t devise rules to make electors think they could be trusted with it. Just an idea of course.
I’m not sure which point you are making. ‘Central government’? If your emphasis is on ‘central’, I strongly agree with you. If it is on ‘government’ then you’re just trolling.
I don’t pretend to understand about fiscal rules. What does really bug me is the Chancellor going on about “growth” when she point blank refuses to invest in the country. Meanwhile the Bank of England’s policy on interest rates makes it almost impossible for anyone else to invest in what the country needs either. Grrrr.
Christopher on paper over the parliamentary term I think Labour are investing about 120bn. Which is about 20% more than their predecessors.
“As a matter of fact, the UK issues its own currency, so it can never run out of money, and yet fiscal rules imply otherwise, and fiscal rules ignore that fact. And so they are based in themselves on a falsehood that there is a shortage of money when the truth is, there is not.”
In Episode 1 of the latest Adam Curtis series called “Shifty” there is archive footage of Keith Joseph warbling on about “the money supply” and inflation (caused by oil/gas price rises – sound familiar?). That was 1980. The tories in full on Neoliberal mode & nothing absolutely nothing has changed since then. UK politicians (traitors?) deliberately destroying the UK industrial base, whilst telling themselves that this would reenergise industry – whilst the evidence in front of their eyes showed the reverse.
Much to agree with
Thank you, both.
Ah, Keith Joseph, baronet of the City of London, heir to the Bovis construction fortune and standing to gain from the privatisation of the state.
Last week, further to a book serialised in Ireland, I was reminded how dodgy Joseph, Leon Brittan and Rhodes Boyson were. This book has been studiously ignored by the British MSM. One hopes readers do their own sleuthing.
I blame the Public Sector Borrowing Requirement (PSBR) that the Tories made a lot of – a fantasy (based on tax funding everything) but an effective trap nonetheless that hobbled New Labour initially and helped to keep Thatcher’s roll back of the state on track when she had apparently been voted out!
The fact that the government owns the bank it borrows from, and that various legislature means that the BoE cannot send the bailiffs around because the government is sovereign, also adds insult to injury.
And this – except here and a few other places – never gets discussed. And thus a huge, immiserating lie is sustained.
The obsession with the PSBR is not just a fantasy, it’s a dangerous fantasy, which leads to nonsense like leasing back lampposts and saddling hospitals with generations of expensive debt, just to keep the borrowing off the books.
The government can borrow more cheaply than anyone else. It should not ever be using expensive private money. If hospitals or schools need to be built, the government should pay to build them, instead of pretending that they can magically be built at no cost by the private sector.
Agreed
If the government wants to build any thing they use a system to maximise the cost and make the builder very rich. A design and build with a cost plus contract seems to be the government preferred method.
What is needed an agreed design, to have a realistic cost estimate. The end user must have project engineers to ensure the specifications are met, all materials are tested to meet specifications, inspect and record all works. This is called “Construction Quality Assurance” and was developed by the construction industry. Why is this not used on all government construction?
Do not forget that the treasury seams to think that doubling the time of construction reduces costs needs to be banned from all input to construction. (overheads can not be cut to match the annual cost reduction and do not forget inflation increases costs).
Gordon Brown redfined the economic cycle in 2005, changing its start date and losing part of a recession. This is what perplexity says now:
Gordon Brown redefined the UK economic cycle in July 2005. This redefinition was significant because it allowed the government to continue meeting its self-imposed “Golden Rule” on borrowing, which stated that the government should only borrow to invest over the course of the economic cycle, not to fund current spending. By moving the start date of the cycle from 1999 back to 1997, Brown was able to claim that the rule had not been breached, despite rising deficits. This move was controversial and widely discussed in both political and economic circles at the time.
At the weekeand I was having a conversation that, admittedly, there were moments when I wasnt sure the facts.
Anyway – I argued about the household analogy and that despite the state corporate propaganda – the UK cant go bust as it can issue money for QE. Firstly, the chap I was speaking to claimed thr BoE is not owned by the Goverment and any QE would send the country bankrupt and then we would have to go the IMF to get a loan and we dont want to do that as we would be in debt for an eternity.
How true is this? I stood my ground but it goes a bit hazy in my head when people start throwing round acroymns of organisations I am not sure of.
Not a word of that is true.
The BoE is wholly woned by thje govermment, and has been since 1946.
It is also wholly answerable to the government, despite any pretence to the contrary.
And we could do QE any time we liked – and not just because £250 billion of bonds have been sold back into markets. Therte is nothing to stop us.
And the IMF – we never did, and never will – need to borrow from them.
Thanks Richard. I kinda suspected that, but wasnt sure.
I didnt know how IMF fitted into everything.
I thought the UK did borrow from the IMF in the 70’s. It was a huge issue at the time.
I found this today on Wikipedia:
“The 1976 Debt Crisis
Anthony Barber, a member of the conservative party in Britain, created a budget in 1972 in an attempt to have his party seize power in the 1974 election. This budget lead to a period of growth followed by a time that would result in high levels of inflation, almost 25%, for the pound. In 1976 investors later became wary of the value of sterling causing the value of the pound to become very low against the US dollar. This balance of payment issue coupled with citizens losing confidence in spending, would result in the UK borrowing 3.9 billion from the IMF. This was the largest loan from the IMF at the time, but only half of the loan would be taken out. The UK rebuilt their reserves and repaid the loan by 1979.”
Was it all a lie?
This was in a totally different economic era
No one understood fiat currencies
Global capital flows were heavily regulated
And, it turned out the loan was never actually needed
In the confusion a loan was taken – the idea of QE was utterly unheard of
You simpy cannot compare then with now
Quite right!!
Your series on campaigning and wealth have been particularly good.
Your seeking of equal opportunity is reminiscent of FDR who promoted that vision in 1944
https://en.wikipedia.org/wiki/Second_Bill_of_Rights
And King promoted it less than 25 years later.
https://www.prrac.org/pdf/FreedomBudget.pdf
Your warning of economic fallacies recall Noble Laureate William Vickrey
Fifteen Fatal Fallacies of Financial Fundamentalism
https://www.pnas.org/doi/full/10.1073/pnas.95.3.1340
Very useful, Joe.