House of Lords Debate: Fiscal Responsibility Bill - Second Reading
Robert Skidelsky
Hansard column: 748-750 | Wednesday, February 10, 2010

My Lords, as this is a money Bill, this House cannot amend it, but I shall discuss the motives and principles underlying it. My speech will not give satisfaction to the two opposing parties, but I hope that, for that reason, it may gain in coherence. As the noble Lord said, we shall see.
The Government are in a bind. The markets are clamouring for retrenchment. On the other hand, the Government know that retrenchment now would be fatal for recovery. This rather feeble measure is the result. It reminds me of nothing so much as the optimistic promises that I used to make to my bank manager when he called me to ask what I intended to do about my overdraft. This, of course, was in the days when I knew who my bank manager was. He was called Mr Gay and was a delightful man.
Deficit reduction will start in 2011 and proceed steadily year by year until 2015. By 2014, at least half of this year's deficit will have gone. By 2016, the national debt as a proportion of GDP will be lower than in 2015 and, after that, we are promised an era of sound public finances. It would be interesting to know the economic analysis underlying this rather random collection of figures and dates, because I have not found it. However, one thing is clear: as for St Augustine, virtue is for the future.
An interesting feature of the Bill is that these promises are set forth as duties. The Government seek to bind themselves to what they promise to perform, but these are not hoops of steel but hoops of elastic. As has been pointed out by other noble Lords, there are no sanctions for non-fulfilment of the duties; there is simply an extra duty to report to Parliament on progress towards and compliance with the other duties, or non-progress and non-compliance, as the case may be. The programme seems rule-bound, but it is at the discretion of the Treasury to be bound by the rules that it lays down. This ample escape clause is no doubt wise, given the fact that neither the Government nor anyone else can know whether they will be in a position to fulfil their duties. That depends entirely on what happens to the economy, and no one knows for how long it will have to be on a life-support system.
This being so, I would rather there had been no Bill at all than one that makes a mockery of the concept of duty. However, given that it may have been politically necessary to have some statement of future intentions with a law-like look about it, I would have liked to have seen an independent fiscal policy committee set up as part of the machinery of the Bill and charged with the duty of reporting to Parliament on the validity of any reasons that the Government might give for non-fulfilment of their statutory duties as laid down in Clause 1. Such a committee, I suggest, should become a permanent part of our fiscal system. Talk about primary legislation and strengthened accountability to Parliament seems to me to be largely eyewash. This Government know that any Government with a reliable majority can always get their money Bills through Parliament.
I want to make a few more general observations. I notice that there is no duty laid on the Treasury to restore the much vaunted fiscal rules that were suspended in 2008. This interim period affords us an opportunity to rethink the content of these rules. The rules state that, over the cycle, the Government should borrow only to invest and that investment should not add to the national debt. In fact, these rules were being broken before the present downturn. Everyone knows that. I am surprised that the Minister said otherwise when he introduced the debate. Part of the doubts about the solvency of government finances today is due to previous cheating on the rules.
By 2007, after five years of GDP growth of 2.7 per cent per annum on average, which was widely accepted as the trend rate, or even above trend, there was no excuse for a deficit in 2007-08 of 2.6 per cent of GDP. Over the period, the Budget should have been balanced on the Chancellor's rules or even been in slight surplus. In fact, there have been only three years of surpluses-1999, 2000 and 2001-over 17 years of positive growth.
The so-called rules lent themselves to manipulation for two reasons. First, no one really knows when cycles start or how regular they are. One can only know for sure in retrospect. Secondly, and possibly more important, public sector investment is an inherently vague term, as the noble Lord, Lord Lawson, pointed out with his usual clarity in his book View from No. 11. His words are worth repeating:
"The current/capital distinction does not have the same meaning in the public as in the private sector. School buildings, for example-however desirable and productive in the larger sense-do not produce a cash return which will service debt interest. Nor are outlays on them inherently more productive than, say, expenditure on better teachers, which counts as current".
Therefore, I have considerable sympathy with his conclusion that,
"those who seek to assimilate the system of public expenditure control to the conventions and methods used in the private sector always remind me of small children playing at shops. It has little relationship to the real thing".
One could argue that we need fiscal rules, and I would agree, but if we are to have them I would prefer the following rule: that the Government should set taxes to balance the Budget when the economy is growing to trend, as measured by a moving average of outcomes over the previous five years, with a surplus accruing when the economy is growing above trend and a deficit when it is growing below. Of course, if a black swan, such as the meltdown of 2008, happens, all bets are off. The rules have to be suspended. There always have to be escape clauses in any financial rules, but that does not seem to be a sufficient reason for not having any.
My final point concerns a matter of economic theory. John Redwood remarked in the other place that,
"we cannot solve a crisis of over-borrowing by borrowing too much in the state sector".-[Official Report, Commons, 5/1/10; col. 97.].
That is definitely wrong. If every bank had started to deleverage simultaneously without any increase in public borrowing, the collapse in aggregate spending would have made the great depression look like a vicar's tea party. Keynes pointed this out years ago in his famous paradox of thrift. The Government are a qualitatively different borrower from a private sector borrower; to treat the private and public borrower as equivalent is like children playing at shops, to use the words of the noble Lord, Lord Lawson. Mr Redwood and most of his colleagues should go back to school.
One may argue about how big the output gap was and is and about whether the stimulus policies have been enough, too much, or well or ill designed, but I am absolutely sure that some stimulus was and remains necessary. The Government are therefore absolutely right to resist the austere spirits who are calling for draconian spending cuts and tax increases now. If this Bill, full of mirrors, is the price that needs to be paid for pretending to listen to them, I am content to support it.