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 Toftand 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.
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