Fiscal policy is formulated in an imperfect world. Politicians do not like to acknowledge uncertainty and error. And so they construct worlds of imaginary certainty in which no errors are made. This is damaging to democratic argument when it is only a public charade. It is far more damaging if politicians come to believe in it themselves.
Finance ministers everywhere are struggling. The US has the largest budget deficit any government has ever incurred. France and Germany have destroyed the eurozone’s stability and growth pact.
British public finances, however, are relatively healthy. In the late 1990s, Britain, like the US, enjoyed a surge in tax revenues associated with the “new economy” boom. As in the US, this surge has receded and public expenditure has increased rapidly. But while President George W. Bush has been cutting taxes, Gordon Brown, the chancellor, has been increasing them. Tax rates in Britain today are probably still a bit too low for current receipts and current expenditure to remain in balance in the long run. But this is not an urgent issue. The overall level of British government debt is modest by historic or international standards. Dangers of recession are greater than dangers of boom. It is sensible, even prudent, to wait and see.
This is the discussion that I assume is taking place within the Treasury. It is not, however, the debate that is taking place in public. Two weeks ago, Mr Brown addressed his most sophisticated political audience, the Treasury select committee of the House of Commons. His content and delivery were technical and boring, seemingly intentionally, as he described revisions to official statistics. Anyone who was still awake must have wondered what he was on about. But newspapers and City tip sheets were alive to its import. They reported that Mr Brown would be able to announce that, despite disappointing fiscal receipts, he had met his “golden rule” and the prospect of tax increases had receded.
No intelligent person could think that a decision as to the level of taxation in 2007 depends on whether close perusal of recalculated statistics might allow the inference that 1997, rather than 1999, marked a turning point in the economic cycle. The term “golden rule” describes the principle that over an economic cycle revenues and current expenditures should match, and consequently that new public borrowing can be used only to create new public assets. The principle is not in fact a rule, but a sensible guideline for fiscal policy, a pragmatic means of judging whether taxation levels have been broadly appropriate to current spending.
The only interesting issue raised by Mr Brown’s statement is the thinking behind it. No more than a few hundred people in the country care about these technicalities – if you ask people in the street what they understand by the golden rule you will get some interesting answers but few correct ones. And those few hundred are not impressed by this ministerial hair splitting. What is really going on?
Part of the problem is that the making of public policy is seen as a private matter. British ministers and officials will often say that they cannot discuss an issue because no decision has yet been made. The exact opposite statement would make more sense. To expose parliamentarians to the real terms of the debate runs the risk – heaven forbid – that they might seek to engage in it.
The search for “evidence-based policy”, in itself admirable, carries the danger that policy drives evidence, not the other way round. The British government could not rely in public on its real motives for going to war in Iraq – supporting the US and removing a nasty dictator – and was instead forced to rely on the “evidence” of weapons of mass destruction and the dodgy dossier.
More often, however, evidence is simply inconclusive. Fiscal policy is formulated in an imperfect world. We are not always certain about what happened in the past – hence those revisions to official statistics – and very uncertain about what will happen in the future. Policy decisions require judgments that will frequently be proved wrong. The same evidence can provide justification for different resolutions of the same issue. Politicians do not like to acknowledge uncertainty and error. And so they construct worlds of imaginary certainty in which no errors are made. This is damaging to democratic argument when it is only a public charade. It is far more damaging if politicians come to believe in it themselves.
