An article in the Financial Times recently said of me: “He has opposed deficit reduction when the economy was weak and when it was strong.” Ah yes, this would be the same economist who has suggested the left aims to reduce the current deficit (all current spending less revenue) to zero, that pre-crisis fiscal policy in the Euro periphery should have been much more contractionary, and has championed fiscal councils as a way of eliminating deficit bias.
Should I have demanded a retraction? I didn’t: life is short, maybe it was a kind of joke, or even a misprint, and if not perhaps it said more about the writer than it did about me.
But I was reminded of it last week when I was discussing pre-crisis fiscal policy. As I noted in one of those earlier posts, I am repeatedly told that pre-crisis fiscal policy in Spain could not have been tighter. It was ‘politically impossible’, given the budget surpluses at the time. I heard a similar point made about Ireland last week. (While a big part of Ireland’s post-crisis fiscal problems were down to socialising its financial sector’s debts, a significant part was also due to relying too much before the crisis from receipts based on an unsustainable housing boom, as was the case in Spain.)
It occurred to me (and yes, I know it is obvious) that such complaints are just the mirror image of those who say we have to have austerity because running up higher government deficits is just ‘politically impossible’. The argument that governments cannot run very large surpluses because voters would demand that they be spent relies on the same logic which says that governments need to tighten their belts when the private sector is doing the same. In other words you cannot complain about austerity on the one hand and then say that it was politically impossible to run larger surpluses in a boom.
Equally it makes no sense obsessing about the need to reduce deficits in a recession and then turning a blind eye when surpluses are spent in a boom. Unfortunately just that kind of inconsistent thinking became hard-wired in the form of the Stability and Growth Pact (SGP), with its focus on a limit of 3% for deficits. Those who say that all that was wrong with the SGP is that it was not enforced have learnt nothing. This is why we need to move influence away from the Commission and towards independent national fiscal councils.