Friday, January 11, 2008

Fixing A Hole

Always plenty of wiggle room with funny money (source: 2007 PBR)

As we survey the grim times ahead, George highlights why Bottler is to blame:

“He didn’t fix the roof when the sun was shining. We’ve got used to Gordon Brown boasting about his reputation for economic competence but his actions betray him. It is his economic incompetence and fiscal incontinence that have Britain more exposed than any other developed economy to the current crisis.”


“We must reform the failed fiscal rules so that never again do we borrow in a boom.”

Well, hurrah for that.

The man certainly deserves a cheer.

Doesn't he?

We've blogged the need for reforming Bottler's leaky fiscal rules many times. There's a gaping hole in them, and the rain is certainly about to come in. But we have a horrible feeling that the hole George has identified is really little more than a few loose slates.

The speech isn't up yet, but he seems to be talking about the government's "current account":

"The Shadow Chancellor will issue an explicit pledge that a future Conservative administration would not run a deficit on the government’s current account during sustained periods of economic growth."

Hmm. The problem with that is that the government's current account is by no means the same as the government's borrowing. For example, in this current year, public sector borrowing is forecast by Darling to be £38bn (and will actually be well over £40bn), whereas his deficit on current account will "only" be £8.3bn (eg see here table 22). The huge difference is accounted for by borrowing to fund capital expenditure.

Indeed, even if you add up all of Bottler's net current account deficit/surpluses since 1997-98 through to 2007-08, they only come to a cumulative deficit of c £8bn (see here). Whereas cumulative public sector borrowing comes to around £175bn.

And there's more. Borrowing is nice and simple- it's basically real money as you or I might recognise it. But the current deficit slides away from such simplicity, off into the realms of funny money. What's current and what's capital? IIRC Enron capitalised its paperclips. And what's depreciation? As all accountants surely know, that's only ever something that exists in the eye of the beholder.

Plus, of course, there's the issue of what George actually means by not running a deficit during periods of "sustained economic growth". Who decides whether the growth is "sustained"? As Bottler's Treasury proved, the world is full of Jesuitical economists who can come up with pretty well anything a sinful Chancellor might require in terms of "cyclical" adjustments to the fiscal actualité.

So we're not altogether cheering yet.

Of course, there is one fiscal rule George could introduce and which would fix the real hole in the roof. A reform which would have us singing his praises from the patched up rooftops of Tyler Towers. That's the third Golden Rule- the one that limits the unfettered discretion of politicos to spend our money. As we blogged here:

"All of our experience tells us that politicians and money- our money- are not a safe mix. We need rules because political discretion can't be trusted. Politicians of all persuasions find it much, much easier to increase spending rather than cut it, so we get a tax and spend ratchet. With a rule, they will be forced to actually find and implement those notorious "efficiency savings", rather than just commissioning another report or ten which merely rearrange the deckchairs.

Just as the seventies showed political discretion was hopeless at "fiscal fine tuning" (hence the abandonment of Keynesianism), and the eighties and nineties showed it was hopeless at monetary management (hence Bank independence), now the noughties are showing (er...reshowing) it's hopeless at managing public spending. If we can't get the politicians removed completely, we need clear simple rules to rein in their excesses."

And remember, these are no longer just the batty ravings of a small government blogger. As we blogged here, a recent major study by the OECD concluded by recommending "fiscal rules with embedded expenditure targets".

Maybe George should take a look.

Update: the speech is now up (here). And a perfectly good speech it is too. But on our question of how he intends to define borrowing, there's no detail. Instead of elaborating on his media briefing reported by the Times, he just says: "We must also ensure that the economic incompetence of a Chancellor never again leaves the British economy in such a vulnerable position. Never again should we be able to borrow in the boom." But at least he reiterates that vital commitment to having fiscal monitoring put into the hands of an independent (NAO style) agency, which ought to ensure much more rigour and transparency.

Tech footnote: The OECD recommends "fiscal rules with embedded expenditure targets". An explicit spending target- along the lines of Reform's Growth Rule- is something we've always wanted on BOM (eg see here). As the OECD observes: "Historical observation is consistent with the regression results in suggesting that in general budget-balance rules that are not combined with expenditure rules are less effective. A striking example of this is the United States experience: neither the Gramm-Rudman-Hollings (GRH) Act of 1985 nor its revised version in 1987 succeeded in significantly reducing the fiscal deficit. A further example is the Stability and Growth Pact (SGP), which has not so far led to sustainable positions being attained, notably in large EU countries. On the other hand, when the United States turned to an expenditure-based rule, the Budget Enforcement Act (1990-2002), a surplus was achieved and maintained for a time. Some EU countries (e.g. Netherlands, Spain, Sweden, Finland and Czech Republic) supplemented the SGP by national rules (in most cases including some expenditure ceilings) and also enjoyed success." (p 43).