The UK’s new fiscal rule won’t last

This post draws upon a blog I wrote for The Reformer.

A few days ago I wrote about the lessons that can be drawn from the recent history of the UK’s fiscal rules. This post measures the Government’s new Charter for Fiscal Responsibility against them. The Charter sets out the Government’s fiscal rule and requires the Office for Budget Responsibility (OBR) to assess Budgets against it. The new Charter lightly updates the previous version in two ways:

  1. It requires the Government to forecast a cyclically-adjusted, current account surplus within three years, rather than the previous five years.
  2. Public sector net debt should fall as a percentage of GDP in 2016-17, a year later than in the previous Charter.

Now compare against the lessons from history.

Complex rules need genuinely independent monitoring and enforcement.

Satisfied by the Charter, which requires the independent OBR to assess compliance.

Durable rules must be resilient to changing economic conditions.

Failed, according to the OBR’s latest forecasts. The chart below shows relevant forecasts for three levels of productivity growth. It shows that, without a quadrupling of growth over the next three years, the fiscal rule is forecast to be broken. A forecast continuation of the current stagnation would immediately breach the first part of the new rule and would suggest that it is likely the second part will also be breached. A rule that will fail if current conditions persist is about as fragile as could be imagined.

Fiscal rules should have operational deficit targets, not debt targets.

This rule has both so it narrowly fails. Recent history suggests that the deficit target is of greater importance to the government. The previous rule was formulated in a similar fashion with slightly different parameters and the debt target was judged likely to be breached for two years, yet the government continued to stick to the deficit target. Even if the deficit target remains in force once the debt target falls by the wayside, the failure of one will ultimately require that the entire Charter be updated again. This clearly isn’t a rule designed to last.