I have posted three new items to the glossary this morning, all in time for tomorrow's budget. They are on:
All of these are part of the mumbo-jumbo of budget day, and all are complete nonsense.
As I explain in more detail below, there are no such things as fiscal rules. There are only fiscal choices. As such fiscal space is simply the spending the Chancellor can make without embarrassing his or herself by breaking their own meaningless rule.
In more detail the entries are as follows, with some similarities having to appear within them:
Fiscal rules
There are no such things as fiscal rules. There are instead fiscal choices.
However, many politicians, and most especially those who have responsibility for the finances of a jurisdiction, often claim that such rules exist. Those politicians create what they described as fiscal rules to justify the fiscal choices that they have made with regard to the macroeconomic options that are available to them.
So, for example, they might stay that the country for whose finances they are responsible will reduce its ratio of national debt as they define it to GDP over a defined period of time.
Alternatively, they might claim that over a period time they will ensure that the expenditure of the government for which they are responsible will equal its taxation revenues.
Any politician has the right to suggest that they think such choices are a reasonable course of action for the government of which they are a part to follow, but this does not make them rules that must be followed. Nor are there any such rules that are imposed upon them: they are always a matter of choice.
Even when fiscal rules are elevated to international standards by organisations such as the European Union they still remain a matter of choice that the country that follows them is obliged to do as a consequence of their decision to belong to such an organisation rather than as a matter of any economic standard or law.
Fiscal rules should be seen as a consequence as a narrative that reinforces particular economic choices within the chosen economic framework that a government chooses to follow. They are in this context particularly popular with politicians of neoclassical or neoliberal persuasion because both argue that it is appropriate to restrict the amount of expenditure that a government might undertake, which restriction is a preference of those who follow those narratives. This does not, however, make them an economic necessity. They are always a choice.
Fiscal choices
Politicians like to claim that there are fiscal rules that they must follow. There are, in fact, no such thing as fiscal rules. Every fiscal rule has been created by a politician in an attempt to demonstrate their own supposed competence in managing the economy for which they are responsible.
When, as is often the case, a politician discovers that this supposed demonstration of competence is not possible because outcomes conflict with what they predicted and their rule is at risk of being broken they have a habit of rewriting declare rules to suit the new circumstances that have arisen. They then use this new rule as the basis of their claim to competence in the future even though they have failed to meet their own rules in the past.
All fiscal rules are in that case actually fiscal choices rather than rules. The suggestion by politicians that they have no choice but follow these rules is, in that case, misleading. The reality is that they have chosen to do so. They could just as easily have chosen some other objective instead.
Fiscal space
Fiscal space is the supposed capacity that a government has to increase spending without risking breaking its own fiscal rules or fiscal choices.
Since all fiscal rules are actually fiscal choices and are not in any way binding the argument that there is fiscal space is almost meaningless.
Fiscal space simply means the amount that a Chancellor thinks he or she might spend without threatening their own credibility. Within the actual economy the term is meaningless.
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Fiscal space aka fiscal headroom? Still harping back to the idea that the chancellor and the treasury are running a household budget, and once the money is spent the cupboard will be bare.
Interesting to see what the Institute for Government says: “Fiscal rules are restrictions on fiscal policy set by the government to constrain its own decisions on spending and taxes.”
* https://www.instituteforgovernment.org.uk/explainer/current-fiscal-rules
They reckon that the first formal “fiscal rules” in the UK were created by Gordon Brown in 1997.
* https://www.instituteforgovernment.org.uk/explainer/fiscal-rules-history
1. Revenues should cover day-to-day spending over the economic cycle
2. Over the economic cycle, debt must average no more than 40% of GDP
That stayed in place for 12 years until 2009. Perhaps that is only possible in relatively benign economic times. The constant rewriting of these rules since 2009 shows how little real value they have, save as messaging of the sorts of outcomes that the Chancellor might like to achieve.
IMF data shows 4 countries with “fiscal rules” in 1985 – Australia, Germany, Japan, Singapore. The US created some fiscal rules in 1986, and they have proliferated from the early 1990s (looks like the IMF are tracking supranational rules as well as national rules – presumably the EU).
* https://www.imf.org/external/datamapper/fiscalrules/matrix/matrix.htm
Lots of detail in the IMF working paper.
I wonder if there is a degree of “cargo cult” or “propter hoc” thinking going on here – some countries with fiscal rules appear to be doing well, so we’d better have some too, whether or not they actually achieve anything.
It all comes down to groupthink in the end
My view is that this is excellent and has needed debunking for ages.
You’ve debunked it, that is for sure.
The situation (& group think) is as bad in the EU. Although this article is ostensibly about energy – it also addresses the “where does the money come from” problem:
https://www.euractiv.com/section/all/opinion/energy-prices-not-us-subsidies-are-europes-biggest-headache/
extract:
“To meet 2030 climate goals, EU governments and the private sector must invest an additional €300 billion annually. In an era of rising interest rates, some member-states can better meet this huge task than others. …… a new EU climate fund would have to be much bigger than the amount spent on energy in NGEU. Such a fund would require a dedicated stream of tax revenues to enable the EU to repay bondholders. The EU’s borrowing costs have been rising – they are now higher than France and Germany’s, in part because it is not clear how EU borrowing under NGEU will be repaid.”
At no point is consideration given to the ECB (European Central Bank) funding the EIB (European Investment Bank). Borrowing thus not needed. Neither do the imbeciles who wrote this nonesense ever consider that most renewable projects provide a financial return (with the capex in anycase being recovered as tax). The fact that such an article was even allowed to be published shows that jorunalists are clueless with respect to economics. Pathetic stuff that is not so different from that produced by the Brits.
Greece was the victim of supposed ECB fiscal rules in the austerity imposed upon them despite Varoufakis’s spirited resistance, resulting in decreased economic activity and a huge increase in poverty. This is despite France, Germany Italy etc having “deficits” spending way above what the rules were supposed to be abided by.
Rachel Reeves talked about the same rubbish quite recently if I remember correctly. It angered me that she did that, but I don’t think I was surprised.
Have you seen this?
https://theconversation.com/why-central-banks-are-too-powerful-and-have-created-our-inflation-crisis-by-the-banking-expert-who-pioneered-quantitative-easing-201158
What do you think?
Some interesting criticisms of central banks & the way they implemented QE, perhaps using an excess of hindsight? Or is that too unkind?
He is right to criticise central banks
He is right to suggest QE has been done badly – but central banks have never seemed to have a clue what it is all about
He is right to say the money shpould haven been used for productive purpose
He destroys his argument by suggesting war and Covid had no impact – which is plainly ridiculous
He has remained a marginal figure for a reason – and that is it
Was it Douglas Bader (?) who said:
“Rules are for the blind obedience of fools – & the guidance of wise men”
But these are not rules
agreed…but the fact is that politicians treat them as rules & axiomatically believe them to be rules requiring comformity & obedience, just as they attribute the word “debt” to things that are not debt with the same mind-numbing conformity & belief….this is a real hindrance to eye opening reform. I suppose we all have to keep banging our heads against this wall until one day, we find ourselves “leaning against an open door”….preferably BEFORE I snuff it…Keep up the good work!