Wednesday, September 28, 2011


Over on my other blog, I've got some limericks about language, grammar and editing.

Because silliness is better than politics.

(It'll help you with the first one if you know that 'stet' is a proofreading term meaning 'leave it the way it was'.)

Monday, September 26, 2011

Brown’s fiscal mistake

Labour’s time in power can be divided into three periods, as far as the public finances go. First, borrowing was reduced to zero and below, cutting the national debt from 42.5% of GDP in 1996/97 to 29.7% in 2001/02. Then, a period of borrowing 2.3-3.3% of GDP a year, raising the national debt to 36.5% of GDP in 2007/08. And finally, all hell broke loose.

It’s the middle six years that are now the most contentious, when the government ran deficits that weren’t huge but were still on the large side given that the economy was doing well.

That said, there was a world economic slowdown around 2001-03, and the fiscal stimulus that resulted from extra borrowing probably helped the UK come through in pretty good shape. Indeed, Chris Dillow goes further, arguing that the longer pre-crisis period was one where government spending was an important prop to the economy – tighter fiscal policy would have meant less growth and potentially a bigger housing boom if interest rates had been cut to compensate.

It’s also debatable how much less bad things would now be if we’d gone into the crisis with a balanced budget rather than a 2.4% deficit. We could have had a bigger stimulus (and, hopefully, a smaller recession), or had the same stimulus with less borrowing overall (so smaller interest payments and, hopefully, slower spending cuts now) – which would have been better. But the flipside of going into the crisis in better fiscal shape, as Chris argues, is that we might have been in worse shape in other ways.

But there is one sense in which Gordon Brown unarguably got it wrong.

This graph shows government revenues relative to GDP (thick black line) compared with a series of Brown’s Budget forecasts (dotted coloured lines):

Year after year, Brown predicted the Treasury’s income was about to rise to 40% of GDP and above; in reality, it never even reached 39%. Now, public borrowing is hard to predict, and so a couple of years of undershooting is acceptable margin-of-error stuff. But by, say, 2004, it must have been clear that something was wrong with the forecasting assumptions: the money consistently wasn’t appearing as expected.

Brown should have rethought his tax and spending plans or at the very least his predictions. After several good years, the Treasury had – like the financial sector – become optimistic to the point of complacency. And so, as they don’t like to mention, had the Conservatives, who in 2007 signed up to Labour’s spending plans for the following years.

Friday, September 23, 2011

Zeno’s paradox of fiscal policy and Osborne’s prophet motive

As Duncan reminds us, the central aim – the “fiscal mandate” – of the government’s fiscal policy is this, as set out by George Osborne in last June’s Budget:

the structural current deficit should be in balance in the final year of the five-year forecast period, which is 2015-16 in this Budget.

The thing about the fiscal mandate is that it’s a rolling target. In June 2010, the end of “the five-year forecast period” was 2015/16. Now it’s 2016/17. During the next election campaign, it’ll be 2020/21.

(Also note that it covers cyclically adjusted borrowing, excluding capital spending. These caveats take out a hefty chunk of the actual deficit. And yes, Brown was just as bad, with his ‘borrow only to invest over the course of the economic cycle’ Golden Rule.)

Which means that the notion of ‘hitting’ this particular target collapses – like the protagonists in Zeno’s paradoxes of motion, we’ll never reach the end of the rolling five-year period and see where it hits. But if Osborne can’t ever hit (or miss) the target, all we can do is judge whether he’s ‘on course’ to hit it.

This is why the Office for Budget Responsibility is so important to him: the official central objective of fiscal policy is for the announcement of that policy to induce the OBR to make a favourable forecast. That’s all.

It is, of course, ridiculous to think that government borrowing can be accurately predicted that far ahead. Osborne and the rest, whatever their faults, are (mostly) not mentally subnormal. And the OBR shows no signs of being any more accurate a coven of seers than the in-house Treasury forecasters used to be.

All of which means that the fiscal mandate in itself is a convenient fiction. Nobody cares about a few billion pounds here or there several years down the line. The real aim of this device is to persuade the king’s prophets to pull something out of the entrails that will give the troops confidence for the fight. And, given the sheer amount of ‘eliminate the deficit by the end of this parliament’ coverage that’s followed, it’s working. Politically, at least. Temporarily, at least.

Because Osborne has allowed an impression to take hold that the target is more rigorous than it really is. That suits him for the time being. But those simplified headlines, which he’s hardly rushed to correct, may end up as embarrassing for him as “Brits 45 mins from DOOM” became for Blair. In early 2015, when we’re still borrowing however much, it’ll look like a failure.

(And, as Duncan also points out, there’s also a ‘supplementary’ target that does have a fixed date: for government debt as a share of GDP to be falling by 2015/16.)

Updte: here's a chart showing what happens to the deficit when you adjust for the economic cycle and then take out capital spending (predictions as per Budget 2011):

Note that Osborne's taget measure (the green line) excludes roughly half of public borrowing at the moment. This cyclically adjusted current deficit was hardly out of control before the credit crunch hit; indeed, Labour had it lower going into their recession than the Tories had it going into theirs at the start of the 1990s. I raise this not to imply that everything was fine in 2007 but to point out that Osborne's choice of target doesn't necessarily do the political work he'd like it to.