On 30th October Rachel Reeves will be setting out her first budget, rather than responding to someone else’s decisions. She will be leading the public discussion, not following the narrative set by another. That will be obvious in terms of tax, because she will be raising taxes rather than pretending to permanently cut them. But it should also be true for the fiscal rules that she commits the government to follow.
In his first budget of 1997, Gordon Brown set out his own fiscal rules. They were very different from anything followed by his predecessor, and they were innovative at the time. They lasted for ten years, derailed only by a global crisis and the worst recession since WWII. The forthcoming October budget is also a chance for Rachel Reeves to establish her own fiscal rules that are better and last much longer than those of her predecessors. [1]
Last week’s discussion of why we have fiscal rules gives us three basic properties that good fiscal rules should have:
They should discourage politicians from using deficit finance (paying for higher spending or lower taxes by borrowing or creating reserves (money)) simply to avoid the unpopularity of raising taxes or cutting spending, rather than for any good economic reason.
Conversely they should not prevent deficit finance when this makes sense in economic terms. For example there are good reasons why fluctuations in public investment should be financed by borrowing, and overwhelming reasons why a deficit financed fiscal stimulus should be used when an economy is at risk from, in, or recovering from a recession.
Fiscal rules should focus on underlying trends, rather than short or medium term fluctuations in spending (wars, pandemics, greening the economy) that
