THE BLOG
12/10/2015 03:52 BST | Updated 11/10/2016 06:12 BST

Why I Will Be Arguing Against the Fiscal Charter on Wednesday

This week the Chancellor will ask Parliament to vote for his Fiscal Charter - the proposal to entrench in law aiming for a Budget surplus "in normal times".

As a member of the Treasury Select Committee I quizzed a range of economists on this idea. Not one, not even the Governor of the Bank of England would endorse it. In June, 79 economists (mainly from the Left and including several on John McDonnell's Council of Economic Advisers) published a letter saying these proposals "have no basis in economics... risk a liquidity crisis that could bring banking problems, a fall in GDP, a crash or all three".

They pointed out that a permanent government surplus would raise indebtedness in the household and business sector. Personal indebtedness is already running at 145% of disposable household income, a total of £1.7trillion and there is a case for pulling this back. It is £200billion above government debt already.

The economists also said that this would prevent the government from responding to the changing economic conditions to stabilise the economy. In other words, this is a proposal to return to pre-Keynesian economics.

In his recent lecture on Keynes' Economic Consequences of the Peace, the Nobel Prize winner Amartya Sen asks how it is possible "for the basic Keynesian insight and analyses to be lost in European economic policies that imposed austerity?"

But it's not just left wing economists - here is Prof Phillip Booth of the right-wing Institute of Economic Affairs calling it "a very, very, very bad [choice]."

As an indication of just how tight this proposed stance is - let me point out that the Chancellors of the Exchequer Lawson and Brown aimed to balance the Budget over the cycle, i.e. surplus in good years, deficits in bad. This new proposal of surpluses throughout the cycle is much tighter.

How much more slowly will we climb out of recessions and what will be the permanent loss to GDP, if we go down this path?

Let us look at this historically - in 1948 national debt was 217% of GDP. In only eight years between 1955 and 2015 has the government run a surplus (incidentally, these were mainly in years when Labour was in power).

And this was because the - perfectly sensible - object of cutting the debt-to-GDP ratio was pursued largely through pursuing growth. I believe that was then, and would now, be a better strategy.

In a modern economy a lot of productivity improvements which are needed for growth come from intelligent public interventions and spending.

Osborne is wrong to think of public spending as inherently a burden on business. I am not arguing against all changes in the composition of public spending - for example, the free TV licences, bus passes and so forth given to pensioners irrespective of income, or the case the Chancellor makes for raising social housing rents to those earning above average incomes seem reasonable - but all the following increase productive capacity:

  • The science budget
  • The education system
  • Much infrastructure
  • Childcare to facilitate the use of women's skills in the labour market
  • Public health services
  • Housing

The truth is this measure has nothing to do with improving our economic performance it is an excuse to ease the political programme of shrinking the state. As Professor Sen also said: "Democracy should be about preventing mistakes through participatory deliberations, rather than about making heads rolls after mistakes have been made." So I shall be arguing against this Charter on Wednesday.