The FT has been broadly supportive of the government’s wait-till-the-conditions-are-right attitude to fiscal tightening – what with Chris Giles and Martin Wolf setting directions there. So you might be surprised to read its leader supporting the EC’s criticisms of the government, and its lack of clarity as to future deficit tightening.
But in Britain Lacks a clear Fiscal Exit Strategy, the criticism is subtly different. Detail, and timing, are separate issues. This in fact the FT’s line:
The possibility of fragile recovery argues in favour of contingent plans. It does not mean there should be no plans at all. The government could, for example, plot to reduce the underlying deficit while outlining temporary stimulus measures that could be deployed were growth to fall short.
As they write later, it is crazy to suspend all discussion of how the diminishing pie be split up, just because we don’t know if 2011 will grow by +3 or -1%. In their words, “Is the government really planning to use schools and hospitals for demand management? Will hip replacement operations now be used as stabilisers?”. No. You don’t want to suddenly mess around with 3-year plans in response to one-quarter growth figures – one of the many reasons for criticising those who insisted on future spending plans being cut immediately when the recession engulfed us 18 months ago (the other minor reason being: you’d turn -6% GDP into -10%).
So what should the government do? In a sense, it is asymmetric; we want a Treasury committed to devoting money to debt reduction if things go well but not if things go badly. This why I agree with the FT’s call today to use (the bulk of) positive surprises to revenues/lower spending for debt reduction, not more goodies. This could buy a lot of credibility. And it looks like we have just such a surprise to the deficit happening now: see the Times story. Unfortunately the Times is probably right that this is seen in Downing Street as ‘money to be played with’.
Things get better than expected – bank the difference. Things get worse than expected – let the public balance sheet absorb it. This is strikingly similar to something I called for 9 months ago in A Balancing Act:* to hypothecate better-than-expected revenues from certain streams towards the debt reduction, not permanent spending increases. That is the sort of prudence-in-advance that might convince bond market investors that this government will not splurge the good times, without a commitment to ****up the economy if things get worse (aka ‘The Tory Plan’).
If only Brown had done this over 1997-2006 we might have far more in the kitty for fighting recession now. That is the real criticism that should be aimed at Labour, not some mad spending splurge in the last 3 years.
*p52 “Tying the government’s hands”