Design flaws in the Government’s fiscal framework and surplus target
6 Aug 2015 12:51 PM
In the latest issue of the National Institute Economic Review, NIESR Director Jonathan Portes examines the government’s fiscal plans for the 2015–20 Parliament and the economic issues raised by the new fiscal framework.
Portes finds that, while the slowdown in the pace of spending reductions is sensible and welcome, the new fiscal framework incorporates a number of significant design flaws. Achieving an overall budget surplus by 2019-20 appears plausible (if the OBR's and NIESR's central economic forecast materialise), although large spending reductions will be required.
However, if growth is significantly weaker than expected, then the surplus target will be far more difficult to meet. The proposed "get-out clause" - which would delay the target date - is poorly designed from both a theoretical and an empirical perspective. This brings its credibility into question.
Moreover, the government's case for the surplus target - the need to reduce debt sharply as "insurance" against a future recession - does not have a strong evidence base. The target is also likely to inhibit a needed increase in public investment, while potentially aggravating the long-standing problem of government manipulation of the fiscal aggregates to meet short-term targets.
One way to mitigate these concerns would be a significant expansion of the role of the OBR to ensure that long-run issues relating to fiscal sustainability and intergenerational equity do not suffer at the expense of short-term targets.
Notes for Editors:
This press release is based on an article entitled “The Government’s Fiscal Strategy”, written by Jonathan Portes, published in the National Institute Economic Review No. 233 August 2015.
This is a quarterly, peer reviewed, economic and social sciences journal. The fullReview is published from midnight on Wednesday 5 August.
For a copy of the article, or to organise an interview, please contact Brooke Hollingshead in the NIESR press office on 020 7654 1923 /email@example.com
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