The Trivialisation of Fiscal Policy
As the government and press celebrate a ‘record budget surplus’, PEF Council member John Weeks writes about the folly of this reaction and the widespread misunderstanding of the aims and workings of fiscal policy.
Earlier this week, I wrote about the trivialisation of monetary policy by the Bank of England, aided and abetted by the media. That is followed this week by another trivialisation, this time of fiscal policy.
If you read the Financial Times this morning, you can be forgiven for thinking that our central government showed an extraordinary improvement in its finances, “The UK government ran its largest July surplus since 2000,” we are told, and even more impressively saw “the lowest year-to-date borrowing [April-July] since 2002”. In response to these numbers an economist at the accountancy corporation PwC tells us “there seems to be a continued underlying improvement in the overall public finances”.
This apparently bland reporting of numbers and its equally bland commentary epitomises the trivialisation and degeneration of economic reporting. These two brief passages from the FT article contain many misleading statements and inferences.
Most fundamental, both the FT journalist and the PwC economist assess a fiscal surplus as an improvement in our public finances. This value judgement, that a surplus is good and a deficit is bad, derives directly from the austerity ideology so successfully sold to the British public and media by former Chancellor George Osborne. Contrary to this “good news” interpretation, the latest figures convey a clear message: that the shrinking of the deficit is a natural consequence of rising tax takes and growth.
Mr. Hammond and Mr Osborne have done nothing more than watch, as spectators, the increases in revenue automatically generated by rising income. When current price household incomes and current price profits rise, personal tax and corporate tax revenue rise.
What the FT reporting does not tell us is that the Tories slowed this natural process of recovery down. Fiscal austerity has kept national income growth consistently below its long term average of 2.3%. The Conservatives and organisations like the IMF and Office for Budget Responsibility severely underestimated the impact of austerity on growth, and by extension on tax receipts; that’s why the Tories couldn’t meet their deficit reduction targets.
The “achievement” of three Tory governments, if it can be called that, has been to delay recovery by holding down expenditures. That delayed recovery reduced revenue growth. That is the story that the FT and other media should have reported, rather than trivialise fiscal policy as changes in the public sector deficit.
Tory governments have not actively reduced the fiscal deficit. On the contrary, those governments have slowed the revenue growth that would likely have reduced the deficit much faster.
The good cheer about deficit reduction disguises another policy failure – fiscal austerity represented among other mistakes a choice not to invest for the future. Given the dearth of private investment, public investment is necessary to encourage innovation and foster productivity growth, whose slow improvement the FT has repeatedly lamented.
Finally, the reduction in fiscal borrowing creates far more serious deficits elsewhere. As John McDonnell (the Shadow Chancellor) said, “The Chancellor has passed on the deficit to his colleagues in other departments: record NHS deficits, schools begging parents for money for essentials, and a growing social care crisis.”
Photo credit from previous page: Flickr / Foreign & Commonwealth Office