Both the IFS and the Resolution Foundation crunch the numbers, and
come up with a broadly similar assessment of the different UK political parties
fiscal plans post 2015 to the one Giles Wilkes, Steven Toft
and I independently arrived at a few months ago. Essentially if
for some reason (?) you want to bring debt down quickly and are not worried
about a further dose of austerity and possibly repeating the mistake of 2010, vote
Conservative.
Are Labour and the LibDems shouting about this really important
difference as a way to gain votes? Exactly the opposite is true - they want
voters to think that they are as ‘tough’ as the Conservatives on the deficit,
but just a little more compassionate in the way they will reduce it. We are in
the world of ‘mediamacro’, where ‘responsibility’ is code for fiscal austerity
(which, in the real world of the liquidity trap, is of course irresponsible),
and ‘credibility’ is code for the policies that business ‘leaders’
and the financial ‘priesthood’ like.
What I want to focus on here is an unusual but welcome piece of
forthright opinion in the IFS assessment. To quote:
“.. the current government’s fiscal mandate is explicitly forward looking with a rolling five-year target, while each of the three parties’ proposed new targets for borrowing seem to relate to a fixed date – that is, all of them refer to achieving the objective during the next Parliament. There are strong arguments in favour of forward-looking, rather than fixed date, targets and all the parties would be well advised to consider rephrasing their objectives in this way.”
As I noted here, this is one of the things this government
got right, and it would be a shame (and dangerous) to take a step backwards. So
the IFS is correct, but the argument appears strange at first, so it
may be worth spelling out.
Having a deficit target to be achieved within the next five
years, where that five year period remains as time moves on (a rolling target)
seems far too easy. There is never a date by which we can unambiguously say
that the target has been achieved or not. It would seem much better to have a
target for a fixed date e.g. current balance by 2020.
The problem with this logic comes when we approach 2020, and
some unexpected shock occurs. Rather than adjusting to that shock gradually
over the next five years, adjustment has to be very rapid. This breaks the
first rule of fiscal management, which is that the deficit should be a shock
absorber, not a rigid target.
In fact we are used to a similar idea from monetary policy.
This attempts to achieve the inflation target within the next two years or so.
(In the UK this two years used to be set in stone, but less so now.) The reason
often given for this is that it takes some time for changes in interest rates
to have their full influence on
prices, but this is only part of the story. Interest rates have some impact on
prices quite quickly, so it would in principle be possible to try and meet an
inflation target with a shorter time horizon, but the reason this is not
attempted is that it would lead to damaging variability in interest rates and
output.
The inflation target that most central banks have is also a
rolling target: no central bank says it will aim to achieve its target by 2016.
This does not stop central banks being accountable for their actions. If
inflation is not on target by 2016, and there were no unexpected shocks over
the previous two years, the central bank will come in for plenty of criticism.
However if oil prices unexpectedly rose substantially in 2015, we would not
want or expect the bank to do everything in its power to keep to its inflation
target in 2016.
The same logic applies to fiscal policy. It is true that
rolling targets do give the fiscal authority the possibility to cheat, and as
Jonathan Portes and I argue (here or here), if the
government has in the past always cheated and there is no institutional
arrangement to stop this happening, then fixed date targets may be an
unfortunate necessity. However we also argue this is not the case in the UK for
two reasons. First, in the past UK governments have proved to be quite capable
of taking the actions required to meet fiscal rules - what has often derailed
them has been unexpected shocks like recessions. Second in the OBR we have an
effective fiscal council which in this respect acts as a watchdog.
So let us hope that the fact that current plans are expressed
as fixed date targets reflect the desire for easy communication just before an
election, and that whoever gets elected reverts back to rolling targets when in
government. Let us hope that achieving fiscal targets by 2020 does not become
part of what mediamacro thinks is responsible and credible.
