Introduction
This is one of a series of posts on this blog which summarise my thinking on some key economic issues about which I am often asked questions. All the posts of this type can be found using this link.
The significance of fiscal rules
Fiscal rules matter because they are said to bind governments, shaping what they can spend and what they must cut. They are presented as if they are laws of nature rather than human inventions. That makes them dangerous. They give the impression that democracy is powerless in the face of supposedly technical necessities. It is precisely because these so-called rules are political choices disguised as economic imperatives that I have often challenged them.
My key ideas
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Fiscal rules are arbitrary inventions by governments. Governments make them, change them, abandon them, choose them to suit their own agendas. The fact that no rule survives unaltered over time demonstrates that they are not genuine constraints but rhetorical devices.
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Fiscal rules obstruct necessary change. By limiting borrowing or constraining deficits or debt, they prevent investment in essential areas — health, education, infrastructure, the green transition — and enforce austerity even when conditions demand public action.
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Fiscal rules rest on forecasts that are always wrong. Because we cannot reliably predict growth, inflation or tax revenue years ahead, rules built on those projections provide cover for austerity decisions more than guidance for wise policy.
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A defensible fiscal rule would look very different. It would accept that sovereign issuers of currency cannot run out of money. It would focus on real constraints — availability of labour, skills, materials — allow counter-cyclical spending in downturns, and preserve essential services and investment.
Why this matters
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Fiscal rules undermine democracy. When ministers say “the rule requires us to do this”, they hide behind technicality rather than admitting that it is their political decision.
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Fiscal rules distort priorities. They push debate toward debt ratios and deficit limits rather than toward outcomes like wellbeing, resilience, equality, or environmental sustainability.
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Fiscal rules embed austerity. Because they present spending constraints as inevitable, they legitimise cuts to public services, benefiting powerful interests and undermining social cohesion.
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Fiscal rules reinforce flawed economic narratives. They promote the household analogy — the false belief that governments must balance books like families — and ignore that governments issue currency. They mislead by treating monetary constraints as fundamental when the real constraint is resources.
Implications
There are a number of implications of this thinking.
Firstly, existing fiscal rules should be abandoned. They are arbitrary, misleading, and harmful.
Secondly, governments should adopt frameworks based on resource use and outcomes, not fixed numeric constraints. The right question is not “can we afford it?” but “do we have the people and resources to do this?”
Thirdly, freeing policy from rigid rules would allow bold investment in public services, infrastructure, and the green transition. That would reduce inequality, build resilience, and improve lives.
Fourthly, it would restore honesty in politics. Fiscal choices would become visible as political decisions, not hidden behind rules. Democracy would be strengthened.
Conclusion
Fiscal rules are not binding laws — they are political theatre. To reclaim democracy and effective public policy, we must drop them and instead confront the real trade-offs governments face in deploying resources wisely.
Reading list
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Abandoning fiscal rules is the price of preserving democracy
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The Courageous State (book)
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The Joy of Tax (book)
Glossary links
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[…] The first was published this morning, on fiscal rules. […]
Agreed.
I recall – I think – a Zen proverb along the lines of ‘Man stands in his own shadow and wonders why it is dark’.
That sums up fiscal rules for me.
🙂
Fiscal rules allow the likes of Reeves to avoid taking responsibility for actions, indeed they allow Reeves NOT to take action.. “it’s all too difficult – I’m bound by these erm rules” style of. Thus does politics fail – utterly.
But, journalists have shown themselves functionally incapable of questioning politicos on matters of finance – this failure as noted on other blogs has been acknowledged by the BBC. What has happened? Nowt. The totality of the UK meeja is gulity of lacking the knowledge to even start to ask the right questions – AND shows no inclination of getting that knowledge.
Thus unless citizens gravitate to sites like this – they will never know what imbeciles they have elected, people you would not trust to run a corner shop.
I agree entirely, Mike.
In addition, I hope you and Richard heard Rachel Reeves’ interview at 08:10 on Today this morning. She actually said that government bonds funded spending. I almost drove off the road in astonishment.
The whole interview sounded as if she really did not know much beyond the usual platitudes.
As Private Fraser would have said, “We’re doomed! Doomed, I tell ya!! Doomed.”
I did not hear that.
But I am not surprised.
But if she really believes it she shows how unsuited she is to be Chancellor, being far too ill-informed to hold the post.
I heard it too and listened in resigned astonishment. Reeves trying to be assertive and doubling down on her failing policies. She really is incapable of understanding more than the most narrow form of mainstream economics. Tufton Street will be weirdly happy about that.
It was really quite extraordinary. She said (in terms) that the UK needs the “market” to keep buying gilts, otherwise the UK could not afford public services. She really does seem to think she is in hock to the City of London not the other way round.
For some reason, no one mentioned bank bailouts or Covid QE which showed that in effect the government can spend whatever it wants, albeit with consequences. Or the problem that QT causes.
Even more crass was Nick Robinson doing a vox pop asking who the rich are – is it people earning over 50k, or 80k, or 100k, or 150k? To which the answer is, they are all well above median earnings, so by some standards “rich”. Compared to say a pensioner on the basic state pension, or a person surviving on universal credit.
A salary of £50k is around the 80th centile for income, but only half the people in the country pay income tax – so that is really the top 10% of the population. But not seriously rich like Rishi Sunak and his wife – who they pay tax at lower rates than most “workers” because they get capital gains and dividends.
And the framing is entirely wrong. Income is not the same as wealth. Someone who has an asset worth £1m but no income is also rich.
A great deal to agree with.
Journalists on £250,000 salaries and massive eye watering private pensions (remember Huw Edwards) have no knowledge of the economy and how it works and just accept what Jacob Rees Mogg or Rachel from Accounts says about them pesky fiscal rules!
Might “Fiscal Alibi” be a more accurate phrase than “Fiscal Rule”?
“Alibi: an excuse usually intended to avert blame or punishment (as for failure or negligence)” (Merriam Webster Dictionary)
I like it…
A “fiscal alibi” to avoid morality – to avoid doing the right thing! So many politicians using it after promising the Earth to get into office!
Your analysis is correct and concisely expressed.
So, why does the political establishment cling to them? Either they really believe that “household economics” applies to nations (with their own currency)… or they are doing it with dishonest intentions.
To quote Nye Bevan (on Eden but applicable to current Labour leadership) “So, if he is sincere in what he is saying, and he may be, then he is too stupid to be a prime minister.”
🙂
Fiscal rules is another way of saying fiscal ‘responsibility’ leading to ‘fiscal consolidation’. All euphemisms for cutting state spending, both current and investment. Much beloved by the Tufton Street mafias.
Martin Sandbu in his book Economics of Belonging describes just how damaging this has been, both socially and to the economic ‘health’ of the country. And he’s an FT economist. depressing that today’s Labour have neither the courage nor the imagination to challenge the thinking that has demonstrably failed. And contributed to Reform’s rise
Mattei is good on “the Capital Order” and the rules it requires to keep people in order.
In the (19) twenties it required wages to be cut , unemployment to tame the trade unions, and Labour Party complicity in the fiscal rules of the day.
Whether Reeves is aware of history , economics and the iron hand of the Treasury /Bank of England as being the problem rather than the solution is open to debate.
But I would encourage Richard to issue his own Budget principles for Rachel to adopt in place of her fiscal rules.
His would assert Keynsian imperatives to restore effective demand into the economy , ie to find jobs for the un and under employed, to restore purchasing power to the lower paid, to ensure houses are built by restoring ownership and control of house building , infrastructure building , management of the utilities etc. To reassert MMT principles that control of inflation comes with taxation not spending cuts. That pension funds need to be better applied to UK investment , not overseas speculation. That the Tax base needs to be widened to include assets and wealth and land taxes. That the big data companies need to be appropriately and sufficiently taxed on turnover, as should the financial services industry who also indulge on tax avoidance to minimise taxable profits. To improve essential public services to Northern European levels. To encourage reshoring of jobs where possible and to encourage our own Farming , fisheries and food industries rather than rely on imports and excessively long transportation routes.
Above all it should encourage a peace settlement in Ukraine . It is in no ones interest to fight a war to the last Ukrainian.
Unless you are an Arms manufacturer.
If you carry on like this, educating people about the lies of neoliberals, I can see Funding the Future soon being listed as a proscribed organisation
“I protest against fiscal rules, the household analogy, and austerity, and I support Funding the Future.”
I’m beginning to see SPADS as a bit like Care Assistants (but less socially useful). They are there to help politicians cope with the world outside Westminster, passing them hi-viz jackets & hard hats when needed and holding up flash cards with slogans and soundbites on them, and of course, keeping them away from the general public and anything written by Richard J Murphy.
I’m slightly cheered by the fact that their job seems to be getting harder by the day, because the truth IS getting out there.
🙂
Another letter to my MP has been sent.
Thanks!
It’s obvious that this government needs to be spending a lot more than it does. Everyone on the street is crying out for better public services, heathcare, and everything else that makes our lives tolerable. Yes, I include welfare as well. In short, a complete reversal of the austerity that got us into such a place as we find ourselves in. I hear a few voices, mainly the wealthy and the ‘comfortable’ saying we cannot afford to do this, but really we cannot afford not to. The answer to the question: how will the gov pay for this?, has been dealt with at great length here over a long period and I don’t need to explain. It’s almost axiomatic.