Autumn Statement & Charter for Budgetary Responsibility

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Question 1: The Chancellor forecasts a cyclically adjusted fiscal surplus by 2017-18 and in cash terms by 2019-20. Do you agree that this planned path of fiscal consolidation is appropriate?

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Question 2: Do you agree that the Charter for Budgetary Responsibility is helpful in underpinning the credibility of fiscal policy?

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Summary

In the December 2015 Centre for Macroeconomics survey, we asked for the panel’s views about the Chancellor’s plans for debt reduction over the rest of this Parliament that were announced in the Autumn Statement on 25 November. We also asked about the economic rationale for the Charter for Budgetary Responsibility that was announced in the summer.

A significant number of respondents felt that the plans for debt reduction were not appropriate and that the Chancellor’s Charter for Budgetary Responsibility would not help underpin the credibility of fiscal policy.

Background

In the Autumn Statement on 25 November, the Chancellor and the Office for Budgetary Responsibility (OBR) unveiled forecasts for real GDP growth to lie at or above trend for the rest of this Parliament – in the range of 2.3-2.5% – and for CPI inflation broadly to return to the target of 2%. Public sector net borrowing is forecast to fall to 3.9% of GDP in 2015-16 and then to fall each year for the remainder of the forecast period. We reproduce the top panel of Table 1.2 from the OBR’s Economic and Fiscal Outlook for November 2015, published in conjunction with the Autumn Statement: [1]

The OBR forecast that the public finances will return a surplus of £10.1 billion in 2019-20 and £14.7 billion in 2020-21. Public sector net debt is forecast to fall each year, reaching 71.3% of GDP in 2020-21.[2] As well as benefitting from some upward revisions to the level of nominal GDP, fiscal consolidation is being achieved by a mix of asset sales, tax increases and welfare cuts.

Depending on estimates of the fiscal multipliers, the extent of spare capacity, the need to maintain low levels of debt in order to deal with a future financial or economic crisis and the impact of any future debt sales on interest rates for UK government debt, one may take issue with the planned path of fiscal consolidation.

Is the path of fiscal consolidation appropriate?

This month’s first question asked respondents whether or not they agreed that the Chancellor’s planned rate of fiscal consolidation is broadly appropriate.

Question 1: The Chancellor forecasts a cyclically adjusted fiscal surplus by 2017-18 and in cash terms by 2019-20. Do you agree that this planned path of fiscal consolidation is appropriate?

Twenty-six of our panel of experts responded to this question, of which 31% agree or strongly agree, 23% neither agree nor disagree and 42% disagree or strongly disagree. These are the respective shares when weighted by the confidence with which respondents hold their opinions: 35%, 19% and 45%.

Many of those who agree feel that at this stage in the economic recovery, it makes sense to aim for a fiscal surplus. George Buckley (Deutsche Bank) argues that ‘to arrive at a balanced budget over the next few years requires roughly 1% of GDP consolidation (i.e. reduction in the cyclically adjusted deficit) per year over the course of this parliament. While that is sizable it is achievable in the event that the economy performs as expected.’

Patrick Minford (Cardiff) further argues that the recovery will increase the costs of debt service: ‘the world is now moving towards a normalisation of interest rates and there will also be a continuation of global recovery which will strengthen the rise in real rates. The cost of servicing public debt will sharply increase; no longer will the government be able to enjoy the financial repression we have seen to date.’

Wouter Den Haan (LSE) uses a precautionary reason as a rationale for surplus ‘the UK economy is doing well, but there are downside risks (Brexit, Eurozone trouble, refugee crisis). Fiscal consolidation now will put the UK in a better position to act if the need arises.’

There are two sets of arguments used to justify disagreement. The first is that the levels of debt are not a great problem with Ethan Ilzetzki (LSE) arguing that ‘the level of public debt in the UK has not been a significant risk throughout the crisis’, and Simon Wren-Lewis (Oxford) suggesting that ‘a period of low interest rates and low real wages is a time to substantially increase public investment… continued surpluses will put all the burden of adjustment on the current generation.’

Others argue that although consolidation is necessary, the pace is too rapid. Martin Ellison (Oxford) thinks that ‘it remains unclear whether the speed of fiscal adjustment is correct or what its distributional impacts might be. There is a possibility that premature fiscal tightening may jeopardise the recovery of the UK economy, and that welfare cuts affect some people disproportionally in what is ultimately one of the richest large countries in the world.’ Michael McMahon (Warwick) does not think that ‘the planned (quite aggressive) spending cuts are necessarily needed at this point and so falling short of the planned cuts would be desirable. If the fiscal surplus is to be achieved, I hope it is because a continued recovery allows revenue collection to meet or surpass its target.’

The Charter for Budgetary Responsibility

To help bolster fiscal credibility, the Chancellor has implemented two key reforms of the process of setting fiscal policy. First, in 2010 the OBR was established as a ‘fiscal watchdog’, which, inter alia, provides an independent assessment of the long-term sustainability of the public finances and provides forecasts of the economy and the public finances. Second, in the post-election 2015 Summer Budget, [3] the Chancellor announced a Charter for Budgetary Responsibility.  

The new fiscal policy framework sets two clear objectives for fiscal policy: (i) to achieve sustainable public finances and (ii) to support the effectiveness of monetary policy. The resulting mandate is in two parts. In ‘normal times’, when a headline surplus has been achieved, the Treasury will target a surplus on public sector net borrowing every year.

At other times, where there has been a significant negative shock to real GDP growth, [4] which is identified by real GDP year-on-year growth in unrevised data of less than minus 1%, the target for a surplus is suspended and a plan for fiscal targets to return to surplus must be presented by the Chancellor and approved by a vote in the House of Commons.

Given the problems of identifying the economic cycle in real time and the complexity of understanding the underlying fiscal position, there might be thought to be a question mark as to whether fiscal policy can be expressed as a simple rule such as the one implied by the Charter. The rule might also be thought not to be especially binding on future Chancellors and therefore of limited value. This month’s second question asks whether or not you agree that the Charter for Budgetary Responsibility is helpful in underpinning the credibility of fiscal policy.

Question 2: Do you agree that the Charter for Budgetary Responsibility is helpful in underpinning the credibility of fiscal policy?

Twenty-six of our panel of experts responded to this question, of which 38% agree or strongly agree, 15% neither agree nor disagree and 46% disagree or strongly disagree. The respective shares when weighted by the confidence with which respondents hold their opinions are: 36%, 11% and 53%.  The debate seems to revolve around the usefulness of a fiscal rule stated in terms of the deficit and whether the targets are either credible or socially optimal.

Panicos Demetriades (Leicester) sums up the mood of those who agree by arguing that ‘it's a step in the right direction, which can help enhance the credibility of fiscal policy, although on its own it is not sufficient to ensure fiscal responsibility. Fiscal policy remains in the hands of democratically elected politicians; if they have other priorities they will always find ways around fiscal rules.’ Ricardo Reis (LSE) goes further ‘this particular rule both takes into account the need to pay for the debt, as well as the desire to respond to the economic cycle. Moreover, by setting regimes and limits, it still allows for considerable discretion in responding to different data while acknowledging that the Chancellor cannot perfectly target a value for the deficit. Of course the rule could be improved, but it is a decisive step in the right direction for fiscal policy.’

For those who disagree, Jonathon Portes (NIESR) sums it up as follows: ‘The Charter is poorly designed, and indeed represents a significant step backward compared to the fiscal framework that operated during the previous Parliament… There is absolutely no doubt that (as in the last Parliament, but against the backdrop of a much more elastic fiscal rule) it would, entirely sensibly, allow the progress of deficit reduction to slip again. In other words, for the period of this Parliament, the new fiscal rule is simply incredible, in the strict sense of the term: nobody should believe it.’

David Cobham (Heriot-Watt) agrees: ‘at the end of the day the Charter will weaken credibility, because the strains it imposes on public expenditure (now becoming more and more visible) will make reneging on the Charter come to seem more and more likely (c.f. Argentina's currency board in the 2000s). 

John Van Reenen (LSE) feels that the ‘obsession with public debt is very harmful to sensible policy-making. We need to consider the assets side of the balance sheet, not simply the debt side. Credibility is not enhanced by setting such targets or having silly laws that can be revoked when needed. At best it leads to financing gimmickry with the public accounts (e.g. manipulating the timing of sales and recording of public assets); at worst it leads to premature austerity and serious reductions in growth and welfare’.

 

[4] The negative shock will count if it has occurred in the ‘most recent 4 quarter period; is occurring at the time the assessment is being made; or will occur during the forecast period’, p7. 

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How the experts responded

Fiscal consolodation

Participant Answer Confidence level Comment
Martin Ellison University of Oxford Disagree Confident
The evidence in Alesina, Favero and Giavazzi (2014 JIE) suggests that fiscal consolidations based on spending cuts have much lower output costs than those based on tax increases, so in pure GDP terms the plan for restoring government finances makes sense. However, it remains unclear whether the speed of fiscal adjustment is correct or what its distributional impacts might be. There is a possibility that premature fiscal tightening may jeopardise the recovery of the UK economy, and that welfare cuts affect some people disproportionally in what is ultimately one of the richest large countries in the world.
Fabien Postel-Vinay University College London Neither agree nor disagree Confident
Michael McMahon University of Warwick Disagree Confident
I don’t think the planned (quite aggressive) spending cuts are necessarily needed at this point and so falling short of the planned cuts would be desirable. If the fiscal surplus is to be achieved, I hope it is because a continued recovery allows revenue collection to meet or surpass its target. Of course, I think there are many downside risks at the moment which would manifest themselves as weaker UK economic growth. My fiscal concern in case these are realised is that the government sticks to, and even increases, the size of the spending cuts in an effort to meet surplus targets.
Patrick Minford Cardiff Business School Strongly Agree Extremely confident
So far the UK has taken about six years to eliminate 60% of its original deficit in 2009-10. This slow and deliberate elimination was wise, given the extreme disruption to the UK economy and is to be contrasted with the mistaken and dangerously fast elimination in southern euro-zone countries due to the faults in the euro construction. However the world is now moving towards a normalisation of interest rates and there will also be a continuation of global recovery which will strengthen the rise in real rates. The cost of servicing public debt will sharply increase; no longer will the government be able to enjoy the financial repression we have seen to date. Furthermore there will be a resumption of much stronger credit growth as banks both regain their confidence and governments retreat from the draconian and mistaken bank regulations post-crisis; this resumption will compel the liquidation of the massive QE programme which has landed central banks with large quantities of government debt (about a third in the UK). In summary markets will be moving against government debt in the coming half decade- yields will be rising, possibly sharply. UK government debt is set to peak at just over 80% of GDP, It makes sense to bring it down towards around 50% or less in the next decade or so. Getting back to a surplus makes sense for this period as it will bring debt down quite rapidly as a share of GDP, and away from the danger zone above 60% where crises would be hard to manage..
Alan Sutherland University of St. Andrews Agree Confident
Jim Malley University of Glasgow Disagree Confident
Simon Wren-Lewis University of Oxford Strongly Disagree Extremely confident
A period of low interest rates and low real wages are a time to substantially increase public investment, yet this is precluded by the aim to achieve surplus by 2019. Such a sharp fiscal consolidation while interest rates remain so low is also risky: if the UK is hit by an unexpected negative shock, monetary policy has little scope to counteract the shock. While a policy to reduce the debt to GDP ratio over the long term is sensible, any deficit under 3% will do this. Continued surpluses will put all the burden of adjustment on the current generation.
David Cobham Heriot Watt University Strongly Disagree Extremely confident
There is no economic justification for such consolidation. The Chancellor should either get himself some proper economic advisers and admit he has been wrong, or come clean about his political reasons.
Ethan Ilzetzki London School of Economics Disagree Confident
It first needs to be noted that while there are significant downside risks for the UK economy, the level of public debt in the UK is not major among them. It has not been a significant risk throughout the crisis. The single-minded focus on naming a date at which the government will be in surplus has no economic rationale. There is no debt sustainability analysis that requires a government to run surpluses, particularly when interest rates are forecast to be low in the forseeable future. A credible plan for fiscal policy is important, but setting a specific numerical target without underlying analysis of the state of the UK economy is futile and may even harm credibility as plans will inevitably adjust to changing circumstances. Appropriate fiscal targets depend, inter alia, on whether one thinks the loss of output in the crisis was permanent, whether we expect to be in a low-interest environment (e.g. secular stagnation) for an extended period, and why we think labour productivity has declined during the crisis. The analysis of the state of the UK economy in the Autumn Statement is primarily political cheerleading for the recovery and does not consider these deeper questions.
George Buckley Deutsche Bank Agree Confident
To arrive at a balanced budget over the next few years requires roughly 1% of GDP consolidation (i.e. reduction in the cyclically adjusted deficit) per year over the course of this parliament. While that is sizable it is achievable in the event that the economy performs as expected. As we have seen with tax credits, however, with only a small majority in the House of Commons the Conservative government may find it tricky to pass some spending cuts through parliament. In addition, the calculations require that the OBR's new methodology for forecasting receipts (which added over £30bn to receipts over the OBR's next six year forecast horizon) is correct.
Michael Wickens Cardiff Business School & University of York Agree Very confident
It is desirable. Given the openness of the UK economy, whether it is attainable depends on what happens in the rest of the world which is out of the government's control. In particular, it depends on the speed of the eurozone's recovery, on the consequences of China's policy switch to a more consumer-oriented economy and on world commodity prices. Provided UK governments run the economy sensibly, much of the UK's economic cycle is due to these external factors. This is not, of course, what government's admit to when the economy is doing well.
Jagjit Chadha National Institute of Economic and Social Research Agree Very confident
The economy is expected to grow in line with trend nominal income and as the financial crisis ebbs into history, it is quite proper to aim for a primary surplus and cash surplus as soon as practicable, Obviously the targets can be changed if there are any negative shocks but I see little scope for a discretionary loosening of fiscal policy.
Andrew Mountford Royal Holloway Strongly Disagree Extremely confident
No. Basic economics argues for spreading the costs of unusually large adverse shocks over time. The planned fiscal consolidation is far from such a smooth adjustment process.
Jonathan Portes National Institute of Economic and Social Research Disagree Confident
My view is that the pace of fiscal consolidation is somewhat too fast, given both the OBR and consensus forecasts see UK growth slowing somewhat, while global growth remains sluggish. However, if the current central forecasts are indeed accurate, the macroeconomic impact will be relatively modest. The more significant objections to the government's fiscal plans are two-fold. First, they are very risky. There is clearly a significant chance that, for domestic or international reasons, will be considerably weaker. In that case the planned consolidation will be very damaging, and the government's fiscal framework may well make things worse not better (see Q2). Second,the plans rely too much on spending cuts (as well as some not particularly efficient tax increases), in order to finance unnecessary and often regressive tax cuts (for example, to inheritance tax). While this does not have significant direct macroeconomic consequences, it may well lead (as with tax credits/Universal Credit) to decisions which are likely to be quite damaging over the medium term.
Paul De Grauwe London School of Economics No opinion Not confident
Costas Milas University of Liverpool Neither agree nor disagree Not confident
The Chancellor has not considered the possibility of a Brexit which might worsen the fiscal and economic outlook. If the British electorate vote in favour of Brexit, we will witness huge investor uncertainty and as a result, a (much) higher rate of return investors demand to be compensated for the greater risk they are willing to take in order to hold UK debt. This higher yield will add to the cost of borrowing that companies face and will delay their investment decisions. All these will worsen the fiscal and economic outlook in the short- to medium term. Perhaps we should sort these issues out before making forecasts for...2019-20.
David Miles Imperial College Neither agree nor disagree Confident
Targets which don't distinguish between capital and current spending are not easy to interpret.
Paolo Surico London Business School Neither agree nor disagree Confident
Francesco Caselli London School of Economics Neither agree nor disagree Confident
Now that the economy is finally recovering, I don't mind the fiscal consolidation. But I am concerned that the target long-run level of government spending as a share of GDP is too low for long run growth and social cohesion.
Gianluca Benigno London School of Economics Disagree Not confident
Ricardo Reis London School of Economics and Columbia University Strongly Agree Very confident
Countercyclical fiscal policy advises that with forecasts of an expansion in output, there should be fiscal consolidation. Moreover, the very large increase in public debt in response to the crisis must be paid for by moving quickly towards primary surpluses before the next adverse shock hits. Calibrating the exactly optimal rate of fiscal consolidation is difficult, but the path for the public debt seems sensible.
Silvana Tenreyro London School of Economics Disagree Confident
I think the fiscal consolidation path is too brisk and could hamper a healthy recovery.
Jan Eeckhout University College London Agree Very confident
Panicos Demetriades University of Leicester Neither agree nor disagree Very confident
It's very hard to say without having access to their models, although from the outside it looks rather optimistic that GDP will grow above trend at a time when Europe is still struggling and there is growing global uncertainty, emanating from geopolitical factors, including terrorism, ISIS, the refugee crisis, the Middle East crisis, tensions between Russia and the West. We are going through some very uncertain times and this will weigh down heavily on the growth prospects of the U.K., which is a relatively open economy and therefore susceptible to events in Europe and the rest of the world.
Kate Barker British Coal Staff Superannuation Scheme Disagree Very confident
Wouter Den Haan London School of Economics Agree Confident
The UK economy is doing well, but there are downside risks (Brexit, Eurozone trouble, refugee crisis). Fiscal consolidation now will put the UK in a better position to act if the need arises.

Charter for Budgetary Responsibility

Participant Answer Confidence level Comment
Martin Ellison University of Oxford Neither agree nor disagree Confident
The Charter is reminiscent of Gordon Brown’s famous “Golden Rules”, a framework that struggled to survive evolving demands as the UK was buffeted by internal and external shocks. It is always difficult to identify the beginning and end of the economic cycle, so micro-managing cyclically-adjusted fiscal policy through rules will inevitably be challenging. The inherent complexity in fiscal policy (as opposed to monetary policy, although the adoption of quantitative easing has made that more complex) also puts pressure on any rule-based approach. That said, it is laudable to write down the main objectives for fiscal policy as (i) sustainability of public finances and (ii) supporting monetary policy.
Fabien Postel-Vinay University College London Agree Confident
Michael McMahon University of Warwick Disagree Very confident
There are two main objections that I have. First, I do not like the focus on a surplus in terms of the fiscal balance. What matters is the sustainability of debt and this should be measured as a percentage of GDP. A surplus on the fiscal balance does not guarantee any sort of fiscal sustainability. Sustainability depends, among other things, on the rate of interest relative to the level of economic growth. A deficit could comfortably be sustained (and even lead to declining debt to GDP) if growth and interest rates are favourable. But equally, a surplus on the deficit does not guarantee sustainable or falling debt as a percentage of GDP. The second objection is the treatment of investment. It is clear that some forms of public investment are necessary for continued UK growth but such spending typically takes longer to bear fruit. As such, by treating it equally to other types of government expenditure, I fear it will be public investment that suffers the most by governments trying to achieve this charter targets.
Patrick Minford Cardiff Business School Agree Confident
The institution of the OBR has been useful. As an independent watchdog it has brought some extra credibility to public finances. As for the Charter, its aim of a surplus in 'normal times' is laudable for now, while debt/GDP is above 80% and looks like being above 60% for the foreseeable future. The arithmetic for the decline in debt/GDP is that if nominal GDP is growing at say 4% (2% real growth plus 2% inflation) then at a balanced budget debt/GDP at 80% will fall by 3.2 percentage points per year. A small surplus effectively guarantees this rate of fall as a minimum; this rate falls to 2 points once debt reaches 50% of GDP. So to bring debt down to 50% of GDP from the current 80% roughly speaking requires a dozen years of balanced budgets. Allowing for the usual slippage on current targets, we are looking at getting debt/GDP down to 50% of GDP by around 2030. Hence it seems right to support the Chancellor's 'normal target' of a surplus for the foreseeable future. Once debt ratios come down to sustainable levels we can loosen it up to a 'normal deficit' of around 2% of GDP which would keep the debt/GDP ratio constant.
Alan Sutherland University of St. Andrews Strongly Disagree Very confident
Jim Malley University of Glasgow Disagree Confident
Simon Wren-Lewis University of Oxford Strongly Disagree Extremely confident
I think fiscal rules, backed by an independent watchdog with a wider mandate than the current OBR, are a good idea. The problem with the fiscal charter is that it is a very bad fiscal rule. Fiscal aggregates are subject to all kinds of shocks beyond the economic cycle, Trying to achieve a surplus each year will therefore lead to costly volatility in taxes or spending, just as having to reach an inflation target each year would lead to damaging volatility in interest rates. The target is also asymmetric in a cyclical sense, and so puts no pressure on governments to reduce debt more rapidly in boom years.
David Cobham Heriot Watt University Strongly Disagree Extremely confident
At the end of the day the Charter will weaken credibility, because the strains it imposes on public expenditure (now becoming more and more visible) will make reneging on the Charter come to seem more and more likely (cf Argentina's currency board in the 2000s).
Ethan Ilzetzki London School of Economics Disagree Confident
Did a single European economy the EU's fiscal targets during the crisis? Could anyone have created in advance a fiscal rule that would have been appropriate for the unforeseen circumstances of the recent crisis? The need to sharply adjust discretionary spending to meet arbitrary targets is harmful to both economic activity and the credibility of the fiscal framework. The objective should instead be to create a system of automatic stabilizers that aims to be budget neutral over the cycle and makes large discretionary adjustments unnecessary in both booms and busts.
George Buckley Deutsche Bank Agree Not confident
Having fiscal rules is a good idea. But they have in the past tended to be changed as and when the government has failed to meet them. For example, if it turns out that the government misses its deadline for the PSNB to be in surplus (2019-20) it could always extend the deadline, as has been done in the past. So in practice, it is questionable how useful they are in policing the government (aside from the general embarrassment of failure, particularly ahead of an election). It seems reasonable to suspend the rules when growth falls below 1% over a 1Y horizon (as is built in to the fiscal rules), since such occurrences have typically been associated with recession when fiscal policy is required to expand to support the economy through difficult times.
Michael Wickens Cardiff Business School & University of York Agree Extremely confident
It is helpful, but it is not the best fiscal stance. Nor can it pre-commit subsequent governments to follow it. The correct policy is to tax finance permanent expenditures and to debt finance government capital expenditures and, in recession, the automatic stabilisers. This will entail running surpluses in good times in order prevent debt from increasing over time. The Charter seeks surpluses in normal times but this is not strictly necessary. In bad times - which could be frequent - surpluses are not appropriate. Like the Treasury under Gordon Brown, it still doesn't seem to understand what best fiscal practice is.
Jagjit Chadha National Institute of Economic and Social Research Neither agree nor disagree Confident
Whilst I am in favour of thinking about how to underpin the credibility of fiscal policy, I am not quite sure that this Charter succeeds. It is specified in terms of a surplus on public sector net borrowing without being clear on the exact magnitude nor on some notion of what a sensible long public debt to GDP ratio might be and what factors determine that ratio. I wonder also to what extent this signals a change in deficit policy or just reveals that basic approach to finances that HMT uses, as my guess is that this is the kind of approach that has always been followed.
John VanReenen London School of Economics Strongly Disagree Extremely confident
See answers to previous question. The obsession with public debt is very harmful to sensible policy making. We need to consider the assets side of the balance sheet, not simply the debt side. Credibility is not enhanced by setting such targets or having silly laws that can be revoked when needed. At best it leads to financing gimmickry with the public accounts (e.g. manipulating the timing of sales and recording of public assets), at worst it leads to premature austerity and serious reductions in growth and welfare (as occurred in 2010-120.
Andrew Mountford Royal Holloway Strongly Disagree Extremely confident
Calling the OBR “independent” is a bit of stretch. It has a staff of 19 civil servants. This is not enough people to produce truly independent analysis and the cynically minded may expect these civil servants to look to the government for their future careers. A truly independent fiscal body will have guaranteed long term funding and a sizable staff with its own credible career structure. e.g. the USA’s CBO has a staff of 235 see https://www.cbo.gov/about/organization-and-staffing Thus fiscal forecasts that rely on the OBRs projections will inevitably invite scepticism even when they don’t hinge on a more optimistic modelling of future tax revenues see e.g. http://www.ft.com/cms/s/0/e65dd262-9384-11e5-b190-291e94b77c8f.html
Jonathan Portes National Institute of Economic and Social Research Strongly Disagree Very confident
The Charter is poorly designed, and indeed represents a significant step backward compared to the fiscal framework that operated during the previous Parliament. In particular, it is simply not credible, in the strict sense of the word, as d) below demonstrates. There are at least four significant defects: a) the surplus target. There is no theoretical or empirical justification for targeting an absolute surplus. The Treasury, in July, claimed that “Running a surplus on the headline measure of borrowing is the only sustainable way to bring down debt as a share of GDP in the long term.” As a matter of arithmetic, of course, this is simply wrong. In fairness to the Treasury, there is no definitive answer here. But recent IMF research suggests that the costs of aggressive debt reduction (in terms of reduced growth and investment now) are rather high, while the ‘insurance’ benefits of a low debt level are rather low. b) the lack of any distinction between current and capital spending, giving the government a further incentive to under-invest (as it has for the last 5 years) at time when long-term interest rates remain very low c) the fact that (post 2019) the target applies in every year; this almost guarantees an unnecessary and damaging degree of pro-cyclicality d) the poorly designed and non-credible "get-out clause" in the case of a negative shock. As the OBR pointed out, a sustained period of 1.5% growth would lead to a fiscal shortfall of about £20-30 billion without triggering the clause. In principle, this would have to be made up by tax increases or additional spending cuts. This is simply not remotely plausible. It is inconceivable that the government would respond toa prolonged period of slow growth by implementing an extra £20 billion in spending cuts (on top of an already very demanding set of reductions); or that (particularly given its commitment not to raise the rates of the main taxes) it would put up taxes by this amount. So in such circumstances, there is absolutely no doubt that (as in the last Parliament, but against the backdrop of a much more elastic fiscal rule) it would, entirely sensibly, allow the progress of deficit reduction to slip again. In other words, for the period of this Parliament, the new fiscal rule is simply incredible, in the strict sense of the term: nobody should believe it.
Paul De Grauwe London School of Economics Disagree Confident
Costas Milas University of Liverpool Neither agree nor disagree Not confident
I am sceptical about how useful a "rule" in terms of "unrevised" data will be. Indeed, at the height of the crisis, we were talking about a double-dip and even a triple-dip recession. A triple-dip never occurred whereas a double-dip one was revised away.
David Miles Imperial College Neither agree nor disagree Confident
Once again fiscal rules that make no distinction between capital and current spending are hard to interpret.
Paolo Surico London Business School Agree Not confident
Francesco Caselli London School of Economics Disagree Not confident
It wil probably be forgotten by the time "normal times" arrive. Which is just as well, as fiscal policy needs to be able to be much more flexible than envisaged by the charter.
Gianluca Benigno London School of Economics Agree Confident
Ricardo Reis London School of Economics and Columbia University Strongly Agree Very confident
Rules allow for credible, transparent, and thus effective policy. This particular rule both takes into account the need to pay for the debt, as well as the desire to respond to the economic cycle. Moreover, by setting regimes and limits, it still allows for considerable discretion in responding to different data while acknowledging that the Chancellor cannot perfectly target a value for the deficit. Of course the rule could be improved, but it is a decisive step in the right direction for fiscal policy.
Jan Eeckhout University College London Strongly Agree Very confident
Panicos Demetriades University of Leicester Agree Very confident
It's a step in the right direction, which can help enhance the credibility of fiscal policy, although on its own it is not sufficient to ensure fiscal responsibility. Fiscal policy remains in the hands of democratically elected politicians, if they have other priorities they will always find ways around fiscal rules.
Kate Barker British Coal Staff Superannuation Scheme Disagree Confident
Wouter Den Haan London School of Economics Agree Confident
The principle of the Charter is a good one. Although there will be some ambiguity in implementing it, it will still impose some discipline on behaving responsible during good times.