Friday February 1, 12:16 AM
UK's Government should scrap fiscal rules - NIESR
LONDON (Thomson Financial) - The Chancellor of the Exchequer, Alistair Darling, should scrap his predecessor's two fiscal rules in his upcoming budget, a leading think tank said today.
Instead, the National Institute of Economic
and Social Research (NIESR) reckons Darling should introduce a new single target for the public finances, which would be assessed by a body independent of the Treasury.
'He should scrap the rules and replace them with a new target that is designed to be more flexible,' said Martin Weale, NIESR's director.
'What we have at the moment hasn't worked,' he added.
The rules, introduced by then Chancellor Gordon Brown in 1997 when Labour came to power, are supposed to be rigid and enforceable, but Weale thinks they are vague and prone to be distorted.
The golden rule states that the government should balance its budget, excluding investment over the economic cycle, while the sustainable investment rule requires public sector net debt, as a percentage of GDP, should not exceed 40 pct of national income.
Weale said the reference to the economic cycle makes no sense at at all, especially as its timeframe is determined at the Treasury. 'It is not a helpful concept,' he said.
'Surprises do happen... something so rigid is a mistake,' he added.
Weale's suggestion is that Darling should introduce a new target, say 40 pct, for debt to GDP, which would assessed by an independent body like the National Audit Office.
He said such a target would provide greater clarity and show the direction government policy would have to take at some stage.
It would be similar to the approach taken with monetary policy, he added.
The Bank (TBHS - news) of England's rate-setting Monetary Policy Committee is compelled to set policy so as to meet a 2 pct inflation target in two years' time.
The government's two fiscal rules have faced a barrage of criticism in recent years, most notably with regard to the economic cycle.
Brown, in his last days as Chancellor before becoming Prime Minister, was accused of manipulating the date when the economic cycle ends in such a way as to meet the golden rule.
The Treasury has suggested the cycle started in 1997/98 and ran to 2006/7, meaning the massive surpluses reported in the early years would help offset the current hefty deficits.
In theory, the logic of the rules is that the government should record surpluses in the year of plenty, which can be offset by deficits in more challenging times.
However, over the last couple of years, the government has posted sizeable deficits even when the economy has expanded at above its long-run average.
'In essence fiscal policy should be saving up for a rainy day,' said Weale. 'We're possibly now having a rainy day, but we haven't been saving up for the last five years', he added.
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