The critics of George Osborne’s proposed fiscal framework to make budget deficits illegal during “normal times” are missing the point. Its main flaw is not the fixation with balanced budgets but the idea that problems are best tackled with rules designed to outlaw errant behaviour.
It was always likely that Keynesian economists, such as those who signed a letter in the Guardian and Paul Krugman in the New York Times, would attack the Chancellor’s proposal. And it is true that the thrust of their argument, that the world is too complex for such a simple framework, has a kernel of truth. But the critics miss far more fundamental objections to the balanced budget proposal.
Indeed many of the letter’s signatories are guilty of supporting measures which embody similar flaws to the Chancellor’s proposal. It has become the orthodoxy for economists to support rules designed to guarantee prudence. Anyone remember the golden rule and the sustainable investment rule introduced when Gordon Brown was chancellor of the first New Labour government way back in 1997?
Of those of the current generation of critics who were around at the time it is doubtful there was much opposition to Labour’s rules. Their objection is simply to the precise wording of such maxims rather than to the principle of having them in the first place.
There are at least three fundamental objections to the imposition of any such economic rules.
First, they are either rigid or useless. If Osborne’s balanced budget framework were adhered to strictly it would be counter-productive. There are certainly times when it makes sense to run budget deficits. On the other hand, once a get-out clause is introduced – as Osborne has done with the stipulation that the framework should only apply in “normal times” – it becomes useless. All that is needed to circumvent the framework is to declare that times are abnormal.
There is a parallel here with the eurozone’s original 1997 stability and growth pact. From the start the eurozone had a framework limiting the extent of deficits and debt but these were first broken long ago by France and Germany rather than Greece. Member states have always managed to find ways round rules that stipulate fiscal rectitude.
The undemocratic character of such frameworks is a more fundamental flaw. They involve arbitrary rules, rather than democratically elected MPs, playing a central role in determining fiscal policy. This is apparent in Osborne’s proposal, which includes resurrecting a long-defunct body – the Commissioners for the Reduction of National Debt – with most consisting of unelected central bankers and judges.
Finally, the focus on balancing the budget embodied in the Osborne approach is blinkered. It diverts attention to what is at most a side effect of a weak economy – a large fiscal deficit – rather than tackling the fundamental causes of stagnation. A more rational economic policy would start by considering how dynamic economic growth needs to be restored. Osborne’s balanced budget rule will simply be a distraction from thinking about the key economic challenges facing Britain. Sadly the mainstream critics are just as narrow in their outlook.
Daniel Ben-Ami is a writer on economics and finance.