A (very) short history of UK fiscal rules

Earlier this week the UK Government announced its new fiscal rule, which defines the fiscal envelope. For those of you who aren’t British, the deficit exceeded 10% of GDP during the recession and fiscal sustainability has become an important political issue, even for people who aren’t econ junkies! Unfortunately, this new rule is unlikely to encourage the sort of sustainability that the Government is hoping for. To understand why, I’m going to write a short series of posts on fiscal rules. This first post will briefly review the history of fiscal rules in the UK. For people who love technical details, this paper by Simon Wren-Lewis and Jonathan Portes is a great review and I’ll be coming back to it later.

A fiscal rule is simply a set of objectives that guide and constrain the Government as it makes policy. The rule usually comprises targets for debt and the deficit, with many variations in the details. Rules were introduced to the UK in 1997 by the then-Chancellor, Gordon Brown. Since then they have had a rocky history, as the chart shows:


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Productivity in the UK and NZ

I see that Patrick Nolan has an article in Public Finance talking about UK and New Zealand productivity.  Go read it, but come back here to comment as they don’t seem to have a comment system.

As we are a NZ audience, I’ll quote this bit:

While New Zealand faces different challenges, its experience can throw light on the UK’s situation. OECD research recently published by the New Zealand Productivity Commission has shown that the country has good resources – investment in physical capital and average years of schooling are broadly consistent with other countries – and policy settings. It is one of the easiest countries in the world in which to set up a business and its tax and regulation regimes are often seen as world class.

Indeed, the OECD estimates that New Zealand should have GDP per capita 20% above the OECD average. But its productivity performance means it is 20% below. In short, New Zealand poses a real challenge for standard prescriptions for what countries should do to lift their productivity performance.

- See more at: http://www.publicfinanceinternational.org/features/2014/06/solving-the-productivity-puzzle/#sthash.qZST25PS.dpuf

In support of dynamic scoring

Estimating the impact of tax cuts is a tricky business. You can fairly easily calculate how the revenue from current income and spending will change, but that’s just the beginning. The problem is that people don’t stand still: they change their earning and spending habits in response to your tax changes, which changes the revenues from the taxes. The UK government is pretty good at estimating that but economists have long known that there are a couple more stages before you have a full picture of what’s going on. That’s why HM Treasury has begun to use a dynamic, computable, general-equilibrium (CGE) model to estimate the effect of tax changes.

CGE models bring us closer to reality…

The CGE model accounts for the long-term effect on the economy of changing behaviour. In the case of cuts in the fuel duty it accounts for the growth in production caused by a reduction in transport costs. Increasing production generates more road traffic, which yields more fuel duty revenues and partially offsets the cost of the cut. Using the CGE model to ‘dynamically score’ (as the jargon goes) the cost of the tax cut incorporates effects these effects that are not a part of the traditional approach. Read more

Also, careful justifying inequality

You have seen me say that some inequality is “good”, and you have seen Shamubeel say that inequality is “natural”.  It was with this in mind that Shaz told me to post about this comment from Boris Johnson.

Despite calling for more to be done to help talented people from poor backgrounds to advance — including state-funded places at private schools — Mr Johnson said some people would always find it easier to get ahead than others.

He said: “I don’t believe that economic equality is possible; indeed, some measure of inequality is essential for the spirit of envy and keeping up with the Joneses and so on that it is a valuable spur to economic activity.”

I fear that people think the value judgments espoused by Johnson are similar to the ones economists hold when discussing inequality – this is not the case.

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