The Economist editorialises:
John McDonnell, the shadow chancellor, has had a bad week.
Having pledged last month to support George Osborne’s latest “fiscal charter”, a law that purports to constrain public-sector borrowing, he suddenly changed his mind.
But in doing so he lost the support of many Labour MPs. On October 14th the charter was passed by a 62-vote majority in Parliament, including 21 Labour abstentions.
Mr McDonnell was left looking foolish and inconsistent. Yet he is right to be against the charter. As growth slows in Britain and across the world, the government will need more, not less, fiscal flexibility.
The charter commits the government to a budget surplus—where tax revenues exceed public spending—by 2019-20. Once that is achieved, it specifies that there must be a surplus in “normal” times.
Only when GDP growth falls below 1% can the straitjacket be loosened.
On the face of it, this sounds reasonable.
“This country has to live within its means,” Mr Osborne said. Britain’s national debt, at about 80% of GDP, is still high by international standards.
However the charter falls down in two big ways.
First, unlike previous pledges, the target for a budget surplus includes capital spending (not just current spending on goods and services).
By 2020 public-sector net investment as a share of GDP will be more than one-third lower than it was in 2010-11.
Yet the British economy is in desperate need of more public investment, with shabbily slow broadband and poor transport infrastructure.
With the cost of borrowing on the floor, the government could easily finance more investments. Mr Osborne’s skimping could prove short-sighted, since it will hit growth and squeeze the future tax take.
Second, it is dangerous to set strict fiscal rules amid today’s uncertain economic climate.
The International Monetary Fund expects world GDP growth of just 3.1% this year, the slowest since 2009. Britain is looking a little shaky.
According to Michael Saunders of Citigroup, a bank, manufacturing is in recession, with output having contracted for two consecutive quarters.
Promising to cut spending for five years, and then forswearing any fiscal stimulus until growth drops to just 1% is unwise and is likely to be junked, just as past fiscal rules in Britain have been when they have been put to the test.
By 2020 public-sector net investment as a share of GDP will be more than one-third lower than it was in 2010-11.
Yet the British economy is in desperate need of more public investment, with shabbily slow broadband and poor transport infrastructure.
With the cost of borrowing on the floor, the government could easily finance more investments. Mr Osborne’s skimping could prove short-sighted, since it will hit growth and squeeze the future tax take.
Second, it is dangerous to set strict fiscal rules amid today’s uncertain economic climate.
The International Monetary Fund expects world GDP growth of just 3.1% this year, the slowest since 2009. Britain is looking a little shaky.
According to Michael Saunders of Citigroup, a bank, manufacturing is in recession, with output having contracted for two consecutive quarters.
Promising to cut spending for five years, and then forswearing any fiscal stimulus until growth drops to just 1% is unwise and is likely to be junked, just as past fiscal rules in Britain have been when they have been put to the test.
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