These claimed essential fiscal rules in the UK seems to be disposable at the whim of the polity

Regular readers will know I have been a long-time critic of the fiscal rules that successive British governments have invoked as part of a pretence that they were being somehow responsible fiscal managers. The problem was that in trying to keep within these artificial thresholds, governments would do the exact opposite to what a responsible fiscal manager would do, which is preserve the integrity of public infrastructure, ensure public services reflected need, and steer the nation in a direction where it was able to meet the challenges that beset it. This period of ‘fiscal rule’ domination has been defined by relentless fiscal austerity and a degradation of living standards as successive governments pursued the neoliberal agendas. Now, it seems the British Labour government is finally realising that it cannot achieve its aims while retaining the fiscal rules they so tenaciously claimed were essential. Back when John McDonnell was the shadow chancellor I told him the rules were unachievable given his policy ambitions. His support crew – academics and apparatchiks vicariously slandered me for running that line. They were wrong and the current decision by the Chancellor to alter the rules proves that. But it also proves how ridiculous these rules are anyway.

This week, the IMF-World Bank Group 2024 Annual Meetings are being held in Washington DC and Ministers of Finance, Treasurers, Chancellors, whatever else these government representatives might be called are attending.

The meetings coincided with yesterday’s release of the IMF’s latest Fiscal Monitor (October 23, 2024) – Putting a Lid on Public Debt.

The IMF have led the charge for several decades in promoting austerity fiscal settings by claiming that governments had to maintain low levels of public debt and run primary fiscal surpluses (where recurrent spending is more than offset by taxation revenue) if they are to avoid harsh consequences.

These consequences ranged from running out of favour with the bond markets (meaning they run out of money because no-one will extend credit to them), causing accelerating inflation, and leaving crushing debt burdens for the next generations that necessitated significant rises in taxes.

All of these claims were fictional.

They were just the predictions made from mainstream macroeconomic models that had little or no connection with reality.

As I have written often – GIGO – garbage-in, garbage-out.

The latest Fiscal Monitor is no exception although there is a creeping nuance in the IMF’s narrative emerging.

The basic line is that after the “turbulence” of the pandemic and the supply-side inflationary episode that followed:

The bottom line: now is the time for a strategic pivot in fiscal policy.

Deficits are high, and global public debt is very high and rising …

The Fiscal Monitor presents a novel framework — debt-at-risk—that provides a summary of risks around the most likely debt projection over one to five years ahead …

In most countries, fiscal adjustments currently in the pipeline are insufficient to deliver, with confidence, stable or declining public debt ratios. Additional efforts are necessary …

The Fiscal Monitor quantifies the relative effects of different fiscal instruments. It finds, for example, that cuts in public investment have severe effects on growth. However, it is unfortunately often the most politically expedient way to axe spending. … countries with strong fiscal institutions are able to protect public investment even in crises.

Detect the nuance?

The IMF acknowledges that nations are going through transitions as “green transitions, population aging, security concerns, and long-standing development challenges are mounting”.

They are now claiming that ‘risk’ of public debt varies and only a proportion of the outstanding liabilities are “in an extreme adverse scenario”.

And that proportion “varies significantly across countries”.

Okay.

There is the usual nonsense that:

1. “Current fiscal adjustment plans fall far short of what is needed to ensure that debt is stabilized (or reduced) with high probability.”

2. “Moreover, delaying is costly”.

3. “Waiting is risky: country experiences show that high debt can trigger adverse market reactions and constrains room for budgetary maneuver in the face of negative shocks.”

The IMF could really sack most of its staff and just program a few key phrases into some word processor file and have a few operators only just pressing key triggers to produce these relentless reports that come out.

Nothing much ever changes – the same language, same threats, the same nonsensical predictions of doom.

But in this Fiscal Monitor they introduce into the conversation that public investment is actually important and can easily become a casualty in a fiscal austerity package.

That is because politicians know that if they hack into recurrent spending – pensions, welfare support etc – the political consequences are almost immediate – people hurt straight away.

However, if they hack into public investment, the existing infrastructure takes a while to deteriorate and by the time the consequences of the cuts are starting to reveal themselves to the voting public the political cycle has moved on.

I have often written about the myopia of neoliberalism.

What are lauded as ‘cost savings’ now turn out to be massive emergency expenditure requirements down the track when dams collapse, or sewerage systems spill out into streets, or motorways and bridges are closed because they have become dangerous for traffic, and more.

There are now countless examples of this syndrome.

The IMF note though that:

Public investment cuts have an even larger negative impact on output because they hamper production and aggregate supply …

… an undesirable adjustment package that relies on cuts in public investment rather than in government consumption and retains most untargeted subsidies —the type of adjustment governments have often put forward in the past …

… a preferred adjustment package that mitigates its adverse impacts on output and inequality. The latter combines revenue and expenditure measures, safeguards public investment, protects vulnerable households through targeted transfers, and phases out untargeted subsidies.

There is the nuance.

Among other things in their “preferred” fiscal austerity approach is that they now want to protect public investment.

They are still advocating public spending cuts overall – cutting “government wage bills … social safety nets, and … costly fuel subsidies” – in other words, business as usual.

And the business as usual also includes “complementary reforms … such as business deregulation, enhancing social protection systems, and reducing labor and product market distortions and barriers to trade in goods and services” – AKA stripping away the public support that delivers job protections and restricts corporations from running amok.

But now they seem to think that public investment should not be included in the austerity programs because such cuts not only undermine growth and employment now, but also reduce the scope for the nation in the future to enjoy material progress.

Note: that this in the context of the IMF thinking continued growth is the aim.

They also have finally realised that the current challenges – ageing, climate, health, global security etc – all require strong public investment of the scale that could not possibly be contained within the sort of fiscal straitjackets that the IMF typically advocates.

Nor within the fiscal rules that nations such as Britain have defined as their benchmarks for assessing viable and responsible fiscal policy settings.

Which leads us to Reeves and her obsession with those fiscal rules.

She released a statement as a prelude to her participation in the IMF meetings this week that said:

A Britain built on the rock of economic stability is a Britain that is a strong and credible international partner …

I’ll be in Washington to tell the world that our upcoming Budget will be a reset for our economy as we invest in the foundations of future growth …

It’s from this solid base that we will be able to best represent British interests and show leadership on the major issues like the conflicts in the Middle East and Ukraine.

But the UK Guardian article (October 24, 2024) – Reeves to announce major change to fiscal rules releasing £50bn for spending – apparently knows that the Chancellor is about to alter the fiscal rules she claims were sacrosanct when she took office.

The Guardian article says:

After weeks of speculation, the chancellor will confirm at the fund’s annual meetings in Washington on Thursday that next week’s budget will include a new method for assessing the UK’s debt position – a move that will permit the Treasury to borrow more for long-term capital investment.

The change to the debt rule will be welcomed by the IMF, which says spending on UK infrastructure projects should be ringfenced as the government seeks to repair the damage to the public finances caused by the pandemic and the cost of living crisis.

So yesterday, the fiscal rules, currently defined as a primary balance or surplus plus reducing the public debt to GDP ratio by the fifth year of government, were deemed inviolate and the exemplar of fiscal responsibility.

But today, apparently, those rules are no longer appropriate and the government can borrow massively to fund public investment and that borrowing is ring-fenced from the interpretation of the public debt ratio for the purposes of defining the appropriate fiscal rule threshold.

You may ask: what the hell has changed from yesterday.

Answer: zip.

Which goes to show how arbitrary all this fiscal rule nonsense really is.

Why are financial markets likely to accept such an increase in public debt when apparently, yesterday they would have assessed such an increase to be too risky, which would lead them to ‘sell off the currency’?

The question is not serious of course.

But the polity should be forced to tell the British people why today is different from yesterday, before Reeves gets up and changes the rules.

And don’t think that British Labour are about to get reasonable.

As long as they hold onto the recurrent spending must be fully offset by taxation part of the rule they will have to initiate significant spending cuts and/or taxation hikes.

Which then brings into question that aspect of these arbitrary rules.

There is no hard and fast demarcation between recurrent and capital spending.

The convention is to define recurrent spending as that where the benefits are exhausted within a financial year.

So teachers and nurses salaries are considered recurrent as an example.

Conversely, capital spending delivers benefits over many years (at least more than one).

So a bridge is a capital item.

So far so good.

But what do teachers and nurses do?

Arguably, they educate, train and/or protect the health of the next or current generation of workers so they can be innovative, productive etc.

The benefits of that work clearly extends over a lifetime.

All of which means that the demarcation between recurrent and capital is pretty flaky at best.

Which means, in turn, that the cuts that Reeves will propose to satisfy the first part of the fiscal rules could easily be interpreted as undermining the future prosperity of the nation.

Indeed, we read that:

The chancellor will say in the budget that the government’s main fiscal rule will be that day-to-day spending should be covered by tax receipts, with borrowing used only for capital spending. The Treasury says this will mean tax increases and spending cuts of up to £50bn.

So don’t think that this ‘rule change’ will alter the austerity bias in the UK.

Conclusion

It is quite amazing how these characters just assume that we have no memories and are stupid to the core.

One minute – fiscal rule A is important and essential, then, the next – another fiscal rule is important and essential.

And the IMF has decided to back this shift in the UK after decades of telling the world that public debt is bad and governments should run surpluses (including on the capital account).

They obviously think we are fools.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.