British Labour’s obsession with fiscal rules is untenable and ignores the reality of the situation

I have been a consistent critic of the way in which the British Labour Party, both in opposition and in government, is obsessed with rigid fiscal rules, thinking it is the only way that it can demonstrate fiscal credibility (whatever that is in their minds). The result is that they get cornered into situations that either lead them to make poor decisions which lose them votes and give the likes of Nigel Farage more fuel for his crusade or they are forced to admit they cannot achieve the (unachievable) fiscal rules. Either way it is a clusterf*)@. In the last week or so, we have witnessed the ludicrous situation of the British Office of Budget Responsibility failing to protect its own file systems and leaking information before the Chancellor presented her official fiscal statement. The leaked information just happened to contradict the messaging of the Chancellor which was a bit inconvenient. But the important issue that all this raises is not whether OBR can run a secure WordPress site (evidently it cannot), but that the information it generates is so inaccurate and systematically biased that it cannot realistically be used as the basis for assessing fiscal policy. Which means that the obsession with the fiscal rules leads to policy changes that damage things that matter – such as employment and services – but those policy changes are based on information (OBR forecasts) that subsequent revelations tell us would not justify those policy shifts. As I said – clusterf8x@.

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The British government’s obsession with the fiscal rules is driving the economy towards recession

The UK economy is heading into a malaise. The latest news – UK construction activity in July falls at steepest rate since Covid (August 6, 2025) – and – UK services sector has biggest fall in orders for nearly three years (August 5, 2025) – confirms that there is a slowdown underway. That was prefaced by rising unemployment and falling overall GDP growth in previous data releases. However, when we examine statements coming from the Labour government, the Prime Minister is hinting that there might be tax rises in the Autumn Statement because a neoliberal oriented ‘think tank’ has told it that there is a £40 billion gap in the fiscal outcomes, which will breach the self-imposed limits specified in their fiscal rules. So the Government is contemplating more austerity and contractionary policy at a time when private spending is subdued and the economy is going backwards. It just demonstrates how the obsession with these fiscal rules grossly distorts fiscal decision making and focuses government eyes on all the wrong things. I am still amazed when I think how stupid we all have become for thinking that any of the stuff is acceptable.

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British government spending cuts will probably increase the fiscal deficit and make the ‘non negotiable’ fiscal rules impossible to achieve

The British press are reporting that the Government there is planning further spending cuts of the order of billions of pounds because the economic environment has changed and the current fiscal trajectory is threatening their self-imposed fiscal rules thresholds. We already heard last week how the Government is significantly cutting Overseas Aid as it ramps up military expenditure. Now, it is reported that billions will be cut from the welfare area and the justification being used is that there is widespread rorting of that system by welfare cheats. There are several points to make. First, getting rid of rorting is desirable. But I have seen no credible research that suggests such skiving is of a scale sufficient to justify cutting billions out of welfare outlays. Second, quite apart from that question, the micro attack on the welfare outlays have macroeconomic consequences. The British Office of Budget Responsibility estimates that the output gap is close to zero which means it is claiming there is full employment. Even if that is true, that state is underpinned by the current level of government spending (whether it is on cheats or not). If the spending cuts that are targetting rorting are not replaced by spending elsewhere then a recession will occur and the Government will surely fail to achieve its ‘non negotiable’ fiscal rule targets. It is a mess of their own making.

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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.

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More misery and dysfunction coming for France – as the fiscal rules bite

For all those Europhile progressives who have held out that reform is the way to deal with the neoliberalism of the European Union and even, in some cases, claimed that the austerity mindset was over (once the fiscal rules enshrined in the Stability and Growth Pact were temporarily suspended during the pandemic), the behaviour of the French government should wake them out of their delusional reverie. The new Prime Minister addressed the National Assembly last week and outlined a new fiscal direction involving significant expenditure cuts and tax hikes. His plan will not satisfy the European Commission, however, who under the Excessive Deficit Protocol (EDP) have indicated they want a faster transition back to the fiscal rule thresholds (that is, even harsher austerity than Barnier is proposing). This policy shift is in the context of an elevated unemployment rate (which is rising) and an already significant output gap. The austerity is likely to push the unemployment rate towards 9 per cent (around) and will be a disaster for the prosperity of the French people who are still enduring the cost-of-living fallout from the pandemic and the Russian-Ukraine situation. Add in the possible impacts of the Middle East crisis and we have a failed state. Once again the fiscal rules defined within the EMU architecture are going to deliver shocking outcomes.

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More economists are now criticising the British government’s fiscal rules – including those who influenced their design

There is renewed debate in Britain at present on the use and design of the new government’s fiscal rules, which many people are now saying will force expenditure cuts which will “damage the ‘foundations of the economy”, according to the Financial Times article (September 16, 2024) – UK spending cuts would damage ‘foundations of the economy’, Reeves told. Those reported ‘telling’ Reeves include British economists, who were instrumental in the design of the rules that the new Chancellor has taken on and deemed necessary to rigidly control government spending. The economists claim that if Reeves continues to operate according to the fiscal rule “inherited by the Labour government” it will cut public investment expenditure significantly and undermine prosperity. I agree that the application of the ‘Fiscal Rules’ will be damaging but I find it amusing that some of the ‘Letter Writing Economists’ were prominent in advocating such rules in the past as the way ahead for British Labour are now criticising those rules.

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British Labour Party once again tripping over their nonsensical fiscal rules

Regular readers will know that I am not enamoured with the British Labour Party leadership and its obsession with its so-called fiscal rule, which is really just a continuation of the rule that the Tory’s were supposedly running with. How can a self-styled progressive party (so-called) that is about to take over a nation that has been shattered by 14 years of the worst Tory rule that one can imagine, and which will require billions of pounds to be spent to even put a dent in the degradation in infrastructure, services, not to mention addressing the forward-looking challenges (health, climate, etc), claim that a fiscal rule that is biased towards austerity be appropriate? It beggars belief. By continuing with such rules, the Labour Party is ensuring that it will either fail to make much headway in redressing the damage and placing Britain in a better position to deal with the carbon challenges or will fail to meet the fiscal rules or both. It is recipe for not much. Pity the British people who have already endured the consequences of supporting, first Blair’s Labour, then the long hard years of the bumbling and incompetent Tories. In today’s post I want to highlight one aspect of the fiscal rule absurdity, and actually say that Nigel Farage is right about one thing, although not for the right reasons. Read on – a story of corporate welfare and fiscal fictions unfolds.

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Eurozone fiscal rules bias nations to stagnation – exit is the remedy

It is Wednesday and I am doing the final corrections to our Macroeconomics textbook manuscript before it goes off to the ‘printers’ for publication in March 2019. It has been a long haul and I can say that writing a textbook is much harder than writing a monograph not only because the latter are more exciting in the drafting phase. The attention to detail in a textbook that runs over 600 pages is quite taxing. Anyway, that is taking my attention today. I also plan to write some more about Brexit in the coming weeks and Japan (tomorrow). But today, I have updated some ECB data on household and corporate borrowing and the cost of borrowing to see what sort of recovery is going on. With nations such as Germany now recording negative growth in the third-quarter, it is clear that the Eurozone is stalling again. The explanation doesn’t require any rocket science. It is all there in the behaviour of the non-government sector (saving more overall) and fiscal rules that are too tight to offset that saving desire. The reliance on monetary policy is an ineffective tool to provide the offset in non-government saving overall. Fiscal policy has to be reinstated to the primary position and that means nations such as Italy must consider exiting the dysfunctional monetary union that biases nations to recession and stagnation.

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The New Keynesian fiscal rules that mislead British Labour – Part 3

This is Part 3 (and final) in the series which examines the robustness of claims made by two British academics about the desirability of the British government (particularly Labour) adopting further fiscal constraints on their flexibility to advance well-being in that nation. Part 3 further develops the critique and focuses on the validity of tightening voluntary constraints on government and outsourcing key parts of the fiscal policy development process to so-called ‘independent’ fiscal councils or boards. We conclude that these suggestions would further entrench the neoliberal dominance of government policy and reduce its capacity to serve the wider interest. In effect, taking this sort of advice would be counterproductive for British Labour, which really needs to to further break out of its recent Blairite neoliberal past and present a truly progressive manifesto to the British people that will force the Tories to move closer to the centre and squeeze the extreme right-wing elements. This will require more than articulating progressive-sounding social and environmental policies. It will require more than proposals to renationalise the railways. Effectively, British Labour has to reframe the macroeconomic debate and eschew the sort of reasoning that the mainstream of my profession offers. It must, in my view, embrace Modern Monetary Theory (MMT) principles to free itself from the shackles of all the neoliberal mumbo jumbo that the New Keynesians continually offer as economic verities. The reality is the the New Keynesian approach has one output – an elaborate litany of lies.

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The New Keynesian fiscal rules that mislead British Labour – Part 2

This is Part 2 of my Three Part exposition of how the standard New Keynesian approach to the specification of fiscal rules will generate poor advice for politicians desiring to achieve progressive socio-economic goals. The paper I am using to represent the New Keynesian approach has, by all indications, been somewhat influential in the formation of the macroeconomic approach currently being espoused by the British Labour Party. In that sense, the critique aims to disabuse the Labour politicians and their apparatchiks of building policy options based on fake economic knowledge, and, instead, embrace the principles of Modern Monetary Theory (MMT), which provides an accurate depiction of how the monetary system actually operates and the policy options for a currency-issuing government such as in Britain, and the likely consequences of deploying these options. The one major lesson that comes out is that the New Keynesian approach is an elaborate fraud. It plays around with so-called ‘optimising’ models asserting human behaviour that no other social scientist believes remotely captures the essence of human decision-making, and then derives conclusions from these models that are claimed to apply to the world we live in. Prior to the GFC, these ‘models’ didn’t even consider the financial sector. The fact is that nothing of value in terms of specifying what a government should do can be gleaned from a New Keynesian approach. It is barren.

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The New Keynesian fiscal rules that mislead British Labour – Part 1

The British Labour Party is currently leading the Tories in the latest YouGov opinion polls (February 19-20, Tories 40 per cent (and declining), Labour 42 per cent (and rising). They should be further in front, given the disarray of the Conservatives as they try to negotiate within their own party something remotely acceptable about Brexit. When there is this degree of political capital available, in this case for the Labour Party, a party should use it to redefine policy agendas that have gone awry. To build a narrative that will advance their cause for the future decades. British Labour has a chance to break out of its recent Blairite neoliberal past and present a truly progressive manifesto to the British people that will force the Tories to move closer to the centre and squeeze the extreme right-wing elements. In part, under Jeremy Corbyn and John McDonnell, Labour is making progressive noises on a number of fronts. But ultimately, where it really matters – the macroeconomic narrative – they are remaining firmly neoliberal and this will blight their chances of pursuing a truly progressive agenda. One of the glaring mistakes the Labour Party has made is to accept advice from neoliberal economists (so-called New Keynesians) who have instilled in them a need for fiscal rules. This is a three-part analysis of the sort of advice that Jeremy Corbyn and John McDonnell are getting and why they should ignore it. I have split it into two parts because it is long and quite involved at times.

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Portugal demonstrates the myopia of the Eurozone’s fiscal rules

On March 24, 2017, the Portuguese government (via Instituto Nacional de Estatística or Statistics Portugal) sent Eurostat its – Excessive Deficit Procedure (1st Notification) – 2017 – which is part of the formal process of the EU surveillance on the fiscal policy outcomes for Member States. The data submitted to the EU showed that the Government had reduced its fiscal deficit from 4.4 per cent in 2015 to 2.1 per cent in 2016, thus bringing it within the Stability and Growth Pact rules (below 3 per cent). However its public debt to GDP ratio rose modestly over that time from 129 per cent to 130.4 per cent. The other stunning fact presented, which hasn’t received much attention in the media, was that government spending on gross fixed capital formation fell from 4,049.3 million euros in 2015 to 2,879.6 million euros in 2016, a 29 per cent decline. Further, real GDP growth has been positive for the several quarters now and this has boosted tax revenue. The popular press has been claiming this is a Keynesian miracle – spawning growth and cutting the fiscal deficit. There is some truth to the statement that the ‘Socialist’ government has reversed some of the worst austerity policies introduced by the previous right-wing government, acting as puppets of the Troika. But what has been going on in Portugal highlights the myopia inherent in the restrictive Eurozone fiscal rules, which promote very short-term behaviour on the part of the Member State governments. As Portugal is currently demonstrating, it is prepared (and is motivated by the fiscal rules) to sacrifice sustained prosperity for short-term appeasement of Brussels. Short-term growth can occur within limits at the expense of long-run potential.

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We’re sticking to our strict fiscal rules

I am travelling today and have commitments which will take me into the night. So I have limited blog time. But there is always something to say and while I might say the same thing often I figure that there are thousands of commentators to my one who all say the same (different) thing every day. Anyway today you will learn that the Japanese government can call on the central bank to buy its bonds whenever it wants. You will also learn how crazy the British government is and how obsessive compulsive behaviour locks a nation into slow growth and entrenched unemployment. We’re sticking to our strict fiscal rules – no matter what! Simple conclusion for today – the budget madness continues.

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Deterministic fiscal rules undermine public responsibility

Yesterday I was listening to the ABC Radio National program – Counterpoint – which interviewed author David Freedman about his 2007 co-authored book A Perfect Mess. I was very interested in this book when it was published. It is about the value of mess and the costs that organisational freaks impose on us. In the case of fiscal policy – the essence of good macroeconomic management is to allow policy settings to be responsive when needed. Why? To ensure that government action supports aggregate demand and is consistent with private sector saving desires. The control freaks want to impose “organisation” on governments by legislating debt brakes and this type of organisation amounts to a fundamental denial of the need for fiscal policy to be reactive and flexible. That is, of-course, no surprise given that deterministic fiscal rules are proposed by ideologues that are fundamentally opposed to public intervention in the first place. Deterministic fiscal rules in fact undermine public responsibility.

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In austerity land, thinking about fiscal rules

I am now in Maastricht, The Netherlands where I have a regular position as visiting professor. It is like a second home to me. The University hosts CofFEE-Europe, which we started some years ago as a sibling of my research centre back in Newcastle. My relationship with the University here is due to my long friendship and professional collaboration with Prof dr. Joan Muysken who works here and is a co-author of my recent book – Full Employment abandoned. Our discussions last night were all about the Eurozone and I was happy to know that most of the Dutch banks are now effectively nationalised as part of the early bailout attempts. It is also clear that the ECB is now stuck between the devil and the deep blue sea. If it stops buying national government debt on the secondary markets those governments are likely to default and the big French and German banks the ECB is largely protecting will be in crisis. Alternatively, every day it continues with this policy the more obvious it is that the Eurozone system is totally bereft of any logic. Once the citizens in the nations that are being forced to endure harsh austerity programs realise all this there will be mayhem. The other discussion topic was the possible revision of the fiscal rules that define the Maastricht treaty. That is what this blog is about.

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Fiscal rules going mad …

Several readers have asked me about fiscal rules and I have been promising to write about them for some time now. I was finally goaded into action by the current German rush to madness which will see them constitutionally outlaw deficits. When I saw the news that the German government was pushing constitutional change along these lines I thought good – the Eurozone will be dead soon enough and perhaps a better aligned fiscal and monetary system will emerge. Fiscal rules can take lots of different shapes all of which entrench chronic unemployment and poverty. The only fiscal approach that is applicable to a sovereign government operating within a fiat monetary system is one that ensures full employment is achieved and sustained. Anyway, here is an introduction to the mean-spirited and wrong-headed world of fiscal rules.

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Fiscal policy rules

The World’s financial system would have collapsed in 2008 and early 2009 if the governments of the day (including their central banks) had have maintained the dominant belief held by most mainstream economists that fiscal policy is not capable of an effective stimulus to real economic activity and that building central bank reserves to historically massive levels would cause accelerating inflation. Within a short time, all that orthodox posturing that had been shared by politicians, their advisors, and the mainstream financial and economics media was abandoned and pragmatism reigned supreme. Well sort of! The system was saved because governments largely ignored the dominant mainstream economics view. At the time, I thought that this shift in policy practice was the beginning of a paradigm shift in macroeconomics. The crisis clearly demonstrated the poverty of the orthodox theoretical framework and the policy prescriptions that flowed from it. The dominant theoretical models didn’t even have banking sectors included such was the arrogant ignorance of the profession. However, I was wrong or perhaps a bit hasty in thinking that the defences built up by the orthodox economics Groupthink would fall so quickly in the face of this amazing failure. There was a period of quietness within the profession, save for the manic interventions of some of the more extreme Monetarist elements who called on the governments to do nothing other than continue deregulation and target even bigger fiscal surpluses. But the conservative voices progressively gathered volume as the crisis moved from the probability of collapse to a deep (balance-sheet) recession and the attacks on the fiscal and monetary policy shift that occurred in 2008 and 2009 began to reach fever pitch. Governments retreated somewhat and the recoveries were then stalled and we are where we are now as a consequence – still bearing the residual damage of the GFC with many of the trigger points still unresolved and facing a new calamity. Maybe the paradigm shift is still coming. Let’s hope so.

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Video – Japan at a Crossroads: Fiscal Policy, China, and the Growth

I have limited time today to write a blog post and last night I was sent a new video that I recently recorded with my research colleague at Kyoto University, Professor Fujii where we talk for some hours on the topic – Japan at a Crossroads: Fiscal Policy, China, and the Growth. It was a conversation we had via Zoom that was recorded on Friday, December 5, 2025. We reflect on recent developments in Japan and its relationship with other major countries (US, China, etc) and consider the policy challenges facing the new Takaichi Cabinet. It is a very long session. The transcript was generated by YouTube AI I believe and then edited and is not perfect. A lot of unnecessary aspects are edited out and the latter part of the transcript is really just an AI summary. But I think the record is acceptable. At times, the discussion changed from English to Japanese, where there was some ambiguity in terminology etc, and those segments have been cut from the transcript. I put in timestamps during the transcript to help you zoom into topics of interest. I hope you find something useful in our long discussion.

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Japan GDP growth contracts as politicians fight it out over size of fiscal stimulus

I am travelling today to Tokyo and have little time to write here. But with the latest national accounts data coming out on Monday (November 17, 2025), the discussions within the government are about the size of the fiscal stimulus that will be initiated in the next fiscal round. This The Japan Times article (November 18, 2025) – Extra-big extra budget pushed by some Japanese lawmakers – provides some information. The new Prime Minister is proposing to limit the fiscal shift to an extra 17 trillion yen (about $US110 billion) but a small group within the ruling LDP want the package to be around 25 trillion yen. I think the stimulus should be around 50 trillion yen and there are economists in the financial markets who agree with me. More on that another day. But the current debate is being conducted within the context of the latest – National Accounts – for the September-quarter 2025, issued by the Cabinet Office (November 17, 2025). The economy grew by 1.1 per cent over the last 12 months (down from 2 per cent in the June-quarter). In the September-quarter, GDP shrank by 0.4 per cent, the first negative quarter since the March-quarter 2024. The need for stimulus is clear. The debate is over how much.

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Japan – errant fiscal rule is sure to backfire

The Prime Minister’s Office of Japan has now released the transcript of the – Policy Speech by Prime Minister TAKAICHI Sanae to the 219th Session of the Diet (October 24, 2025). This was her first major speech after taking on the office of Prime Minister and allows us to see some detail beyond the rather general statements she had made previously about being supportive of fiscal expansion. The detail does not build much confidence.

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