I was going to write a post about current UK fiscal rules, but judging by comments I get I think I first need to set out why fiscal rules exist in the first place. There seems to be a lot of misunderstanding about why some countries have them and what they are designed to do. So this blog post is a background piece to a later post that will talk about the specific fiscal rules the UK currently has, and what Rachel Reeves should do about them in the Budget.
Let me start with one reason often given for fiscal rules which is just wrong. This says that government debt as a share of GDP is too high, and we need to bring it down. This is not valid because we have no good reason to believe that current levels of debt are too high. After all, from WWI to WWII UK debt to GDP was much higher, and they are much higher in Japan today. The ‘debt is too high’ argument often implicitly assumes that government debt is a bad thing, and as I explain here that is wrong because it appeals to incorrect analogies with household debt. So any fiscal rule (like the current UK ‘falling debt to GDP’ rule) that presumes lower debt is good is a bad fiscal rule.
However, is there some level of debt to GDP beyond which bad things might happen? A government that borrows in a currency it can create can never be forced to default by the financial markets. However very a high debt level normally involves paying high levels of debt interest, and to do that a government has to raise taxes or cut spending. At some point the political cost of very high taxes
