Fiscal rules

We await new fiscal rules to guide the economy. According to the IFS we have had 12 fiscal rules from 1997 until 2017 and have broken or ditched ten of them. Labour’s aim to keep state debt below 40% of GDP was blown away by their Great Recession and the idea that they would balance the current budget over the cycle with it. Osborne’s aim to get state debt falling as percentage of GDP every year so that actual debt fell from 2014-15 was relaxed when he did not hit target.The 2019 aim of getting the current budget in balance within three years was binned by the pandemic.

All the fiscal rules have been variants of the Maastricht requirements that the deficit should be under 3% and state debt should be under 60% of GDP or declining as a percentage of GDP to get closer to that target. The formal rules are currently in suspension pending new rules. However the Spring 2021 OBR and Red Book was based around getting the budget deficit down to slightly under 3% by 2024-5 and getting state debt falling as a percentage of GDP by the end of the period. It is  all very familiar.

The government is still reporting our progress against the Maastricht rules as if we were still under the EU reporting system and in their semester control. The OBR assures us there are still guides and it still clearly likes the state debt and deficit controls. The rules that the current budget should on average across the cycle be in balance, and capital spending should be no more than 3% of GDP is just another way of expressing the EU  budget deficit ceiling. The way spending growth is constrained in the later years of this Parliament and taxes planned to go up shows just what a grip on policy the state debt controls have.

I am urging a new approach. The  government should stop monitoring the U.K. economy  against the EU debt and deficit rules, and stop budgeting as if they ruled the future. Instead it is a good idea to have a limit on debt interest as a percentage of revenues. The  current limit of 6% is generous and could be brought down to 5%.

There then could be targets for growth and inflation . We  already have  a 2% long term inflation  target which is fine. To produce a balanced policy where there is scope to invest and grow we should set a stretching but achievable growth target. This  should be above 2% for the long term average and should be much higher for this year and next given the need to recover from the pandemic recession.




  1. Ian Wragg
    May 24, 2021

    Rampant inflation to reduce the percentage of debt to GDP.
    It’s coming to a town near you soon.
    Buy gold or tangible assets. Ditch fiat money.

    1. Everhopeful
      May 24, 2021

      Gold yes. Unless they make holding it illegal…done before I believe?
      They’ve screwed houses and buy to let I think?
      I remember hearing about a bloke who bought masses of bricks and buried them in the garden…sold for ££££s after emergency. But BBB houses will be made of mud I hear!
      What else to buy? Silver is volatile I believe.
      Antiques seem to have plummeted.
      China hates Bitcoin…too expensive anyway.

    2. Narrow Shoulders
      May 24, 2021

      Inflation and usury.

      Government should have created this money not the banks. If government had created the money then banks and the wealthy would not now be investing it in assets which will drive inflation.

    3. MiC
      May 24, 2021

      We have had rampant inflation for years already.

      It’s just that the price of most people’s largest purchase, a home, is not included in those figures.

      Many people’s scope for affording a decent place to live is ever reduced. If that is not making people poorer, then I don’t know what is.

      Whatever, let’s hope that John will offer Jeremy Corbyn at least his apologies for his party’s attacks on Labour’s quite modest spending plans, compared with the Tories’ apparent Magic Money Tree approach.

      1. Peter2
        May 24, 2021

        Yet as I proved recently MiC
        There are thousands of homes currently available on sale near you under £150,000.
        Cheaper long term than renting.

        1. MiC
          May 25, 2021

          As I repeatedly tell you, I’m fine, thanks, but millions are not.

          How is someone on 15kpa to afford that?

          1. Peter2
            May 25, 2021

            They could join with another person and share a purchase.
            It is how many people manage to buy their own home.
            Save a deposit and get a mortgage.
            Often cheaper than renting.
            Did you not know MiC?

            First you say homes are unaffordable but when that is challenged you reduce it to…well what if you only earn £15,000.
            Take a look near you MiC loads for sale under £100,000 with some under £80,000
            Others on part buy part rent schemes.

            Ridiculous nonsense from you as usual MiC

  2. formula57
    May 24, 2021

    The point of fiscal rules is what though? To signal to the markets what the Exchequer might be expected to do? Do any serious forecasters really expect the rules to be followed now?

    As for the 2 per cent. long term inflation target, its appropriateness is never adequately explained and some even see it as not as fine as modest deflation.

    1. formula57
      May 24, 2021

      Also, by targeting growth and inflation both at 2 per cent., if we see those outcomes do we get a free pass to claim great success when in reality we will just be standing still?

    2. nota#
      May 24, 2021

      @FORMULA57 – ‘The point of fiscal rules’ may be the point is it allows the HoC and Government to demonstrate to show they can deviate, destroy, with a result the Country and its People are of no concern and are powerless to object.

  3. turboterrier
    May 24, 2021

    Are we ever going to be free of the influence of the EU.
    All the time we keep benchmarking ourselves against them in everything we seem to try to be achieving, this country is never really ever going to move on in it’s own right.
    It seems to me that the country is still trying to hold onto its past just to pacify the remainers who would take us back in tomorrow.

    1. Mark B
      May 24, 2021

      The ‘Deal’ was to appease the Remainers in the Tory party and keep it united. A half in half out approach which will please no one.

      The problem with BREXIT is that we never got ‘Loser consent’. They, the Remainers’, just thought they would win and never bothered to think about what anyone else thought. Sheer arrogance and hubris.

      1. nota#
        May 24, 2021

        @Mark B +1
        Politics in the UK is not about the ‘will of the people’, but the ego of those that grab power

        1. Peter Parsons
          May 24, 2021

          While a system is in place which allows those in power to be there on the support of just 35.2% or 36.9% of those who voted, politics in the UK will never be about the will of the people.

          If you want the politicians to care about your views, probably the best solution currently is to move house to one of the minority of marginal constituencies. As Tim Ross’ book on the 2015 Conservative campaign exposed, the rest of us are irrelevant and get treated as such.

          1. Peter2
            May 24, 2021

            If you have more than 2 parties then the more there are added up will divide the vote if you add up all the lossing parties.
            Even with PR the Conservatives would have a majority.
            Would you still moan then Peter?

          2. Peter Parsons
            May 25, 2021

            If the Conservatives (or any other party) won a majority under a PR electoral system, I would not complain about their right to be a majority government.

            Their level of voter support under the current system would most likely not be sufficient to deliver that, but it is also likely that under a system where every vote genuinely affected the outcome, some people may vote in a different way and others may bother to vote when they don’t today (the evidence shows that this is definitely the case – turnouts in elections which use PR voting are, on average, significantly higher than in equivalent level elections which don’t use PR voting).

            What’s wrong with wanting my vote to count the same as everyone else’s when determining the outcome of an election? That sounds like a democracy to me.

          3. Peter2
            May 26, 2021

            You repeatedly make the error of looking at the result of recent elections and translating them into your favourite PR system.
            People would consider the new rules and would alter they way they vote under PR.
            Voters are not sheep they often vote tactically.

    2. Andy
      May 24, 2021

      Of course we will never be free from the influence of the EU. They are the major regional power and they live next door.

      Are Canada or Mexico free from American influence?

      Is South Korea free from Chinese influence?

      I’m afraid Brexitists voted for us to be irrelevant. And we now are.

      1. MiC
        May 24, 2021

        I think that they believed that they were voting for a time machine, which would take them back to the world before the European project existed.

        It’s strange, certainly.

      2. Peter2
        May 24, 2021

        You are confused between the difference of being an independent nation and being a nation involved on a strict treaty based group of nations
        Influence is a very minor thing Andy and can be claimed to apply every nation on Earth.
        But does Mexico or Canada allow America to set its tax rates or interfere in its economic decisions?
        Or to be able to make laws rules regulations and directives?
        Does South Korea have an open border with China?


      3. Richard1
        May 24, 2021

        Indeed. But neither Canada nor Mexico is in a political (or currency) union with the US, do not have to pay the US for the privilege of trade, and don’t have to accept the imposition of laws and regulations by US govt diktat or from US courts. It’s quite an important difference.

        1. glen cullen
          May 24, 2021

          and the USA will not allow, under any circumstance, either Canada or Mexico to fish in their territorial waters

    3. glen cullen
      May 24, 2021

      Level playing field Sir….level playing field

    4. Ian Wragg
      May 24, 2021

      They’re even thinking of joining the EU carbon purchase scheme, at least the CCC is.

  4. David in Kent
    May 24, 2021

    Perhaps Parliament, representing British taxpayers, could debate and establish a set of fiscal rules for the government of the day to report against. This could be established annually on a 5 year moving basis and voted on as a free vote.

    1. nota#
      May 24, 2021

      @David in Kent – for the most part Parliament represents the Leader that placed them on the Ballot Paper and not the People that we would almost romantically expect them to serve.

      1. Ian Wragg
        May 24, 2021

        Carrie Antoinette.

  5. agricola
    May 24, 2021

    There should be rules for those that spend wealth, better known as government, and totally different guidance for those that create it. I say guidance because nothing should hamper the creators. The grotesque set of ever expanding rules that control how much is taken from the creators to cover the costs of the spenders, better known as the tax book, should be rewritten with simplicity as the guiding rule and reduction as the end result. People and businesses spend more wisely than government.

  6. Mark B
    May 24, 2021

    Good morning.

    There should only be one rule – Do not spend more than what you get in.

    All the above requires political will. There is no will to control State debt much like there is no will to control spending.

    The EU rules only really applied to those using the EURO. This was done to please the German’s. It was also a great way of extracted monies from other countries in the form of fines.

    If a government department overspends, tell the Civil Serpent responsible that wages, benefits and pensions will have to be cut to pay for it. Plus, projects either suspended or cancelled, and a review of why the said department overspent with disciplinary measures for serious misdemeanors.

    If you apply the same rules to the Public Sector that the Private Sector has to abide by you will, overtime, achieve better outcomes. Making silly rules as mentioned is like a weight watcher who keeps telling themselves that they will really stick to their new diet and go to the gym. We all know they won’t !

    And as for inflation figures of 2% – I DON’T BELIEVE YOU !!!

    1. Martyn G
      May 24, 2021

      I don’t believe them, either. Just had this message from my energy provider which seems to be far out of whack with what we are being told.

      “Unfortunately, the wholesale cost of energy has continued to rise dramatically since we last decided to change our prices in March. It’s up by 29% since then and is double what it cost this time last year. This means that we need to raise our prices on 21 June.
      Despite these big shifts in wholesale prices, we have managed to keep this price increase to 8.2% for an average home. Based on your usage we think you’ll spend £2.12 more a week on your energy. We won’t change your monthly payments yet, we’ll let you know if we think they need to change. We’ve attached a letter with more information on how it will affect you.
      We’re sorry we’re putting prices up for the second time this year, especially at a time that we know is difficult for lots of our members. We hate increasing prices and have done all we can to avoid this increase while still providing sustainable energy at sustainable prices”.

      1. Mark B
        May 25, 2021

        And government has the cheek to put VAT on fuel.

    2. Everhopeful
      May 24, 2021


    3. Andy
      May 24, 2021

      I agree we shouldn’t spend more than we raise. Yet the biggest chunks of what we spend go on state pensions, social care and extra health care for the elderly.

      When I point out that we should cut this spending on pensioner perks – because contributors to this blog cost me far more than migrants or asylum seekers or HS2 or green crap or EU contributions or international aid COMBINED – people get angry and accuse me of hating the old wanting to euthanise people.

      It is always easier to identify a spending problem when you think the money is being spent on somebody else.

      1. Peter2
        May 24, 2021

        If you reduce the State old age pension, which for millions is their sole source of income, how will they afford to live, pay their rent, pay heating bills and buy their food?
        Currently £137.60 per week.
        Could you live on that young Andy?

      2. Narrow Shoulders
        May 24, 2021

        because contributors to this blog cost me far more than migrants or asylum seekers or HS2 or green crap or EU contributions or international aid COMBINED

        What you list there Andy are discretionary expenses which could easily be cut.

        If you remove support for those who have paid in during their working lives I wish you luck collecting taxes from the current generation. It is a ponzi scheme as you point out but that is the covenant. I suggest if you want to express anger, aim it at the public sector pensions which are rather generous.

    4. glen cullen
      May 24, 2021

      I agree fully with your first sentence

  7. Newmania
    May 24, 2021

    The suggestion that Maastricht rules have anything to do with the UK`s debts is absurd . You may wish to call 100 % variant of 60% in which case you may equally call black a variant of white. Sir John , was not , as he claims a persistent critic of austerity, the Labour Party and Guardian were .He supported George Osborne`s polices between 2010 and 2016 arguing ( correctly ) that they did not constitute “austerity ” and that the framing of Conservative spending a “austerity “, was not acceptable .
    Only in this tricksy rhetorical sense did he criticise his own Party’s Policies of which he was a regular and effective advocate, for years, on this blog which I read with approval at the time.
    On governing the country only by reference to debt interest and inflation, this is an idea only supported in the darkest corners of magic money tree forests of the internet .
    Debt interest inflation can change over night , inflation can be years building in the system. The common experience of countries who think borrowing is limitless, is that a sustainable spending paradigm in one context will fail in another. By that time the past years of irresponsible foolishness cannot be undone.
    As with his ‘print spend and forget’ theory , he does not believe any such nonsense . It is merely the use of any argument to justify increased spending now, to trick us , with out own money , into thinking Brexit was not an economically damaging mistake it is.

    Reply Desperate lies and misrepresentations today. Why are you so against Brexit success?

    1. Newmania
      May 24, 2021

      If I have misrepresented your previous position it is unintentional. The point of view to which I refer is summarised in ,”The Austerity Debate “Published on this blog May 2014”.
      The last lines
      “…. a country does have to avoid excessive debts and deficits, just like an individual or company. They ( his opponents )seemed to think there is a free money tree in every state’s back garden which just has to be harvested to make us all rich. They did not accept that if you print and borrow too much one day you run out of other people’s money to spend ”
      The National Debt at that time was indeed a terrifying 86% ( or a 26 % above variant on Maastricht if you prefer ) . It is now considerably worse. This post is typical of many in that period .
      I hope you will be happy to be represented by your own words – I agreed with you entirely at the time. Still do .

      Reply Still misrepresenting. Yes you can borrow and print too much, but the speech was not pro austerity.

  8. Sea_Warrior
    May 24, 2021

    I would commend:
    a. Spending less than is received in taxation.
    b. Not borrowing to give away.
    c. Stopping adding one new budget expenditure line after another.
    d. Paying down debt, over a realistic timeline. (See (a), above.)
    e. Not camouflaging wasteful spending as ‘investments’.
    f. Limiting naturalisations to those who are net contributors to the public purse.
    g. Thinking less about growth in GDP and more about growth in GDP/capita. (The latter is hardly mentioned by politicians.)

  9. Dave Andrews
    May 24, 2021

    I have a couple of fiscal rules:

    The generation that takes out national debt pays it back

    Government balances its spending over its term of office

    In order to achieve these aims, it will be necessary to rein in government spending. This might be accomplished by making more spending discretionary. Big ticket items are pensions and benefits, so scale these according to how well the country is doing. It would show good leadership if MPs pension payments were made out of surplus only.
    In the present system, debt is passed down to the next generation with little or nothing to show for it, and it’s a scandal.

  10. Lifelogic
    May 24, 2021

    The main things that the government need to do is to unlock now & stop wasting money hand over fist – usually producing little or nothing of positive value and very often doing positive harm. It should and halve in size at least, reduce and simplify taxation hugely and increase the size of the private & far more productive tax generating sector. It must also ditch the moronic net zero lunacy which is clearly economic and environmental lunacy. They alas show no sign of even doing this.

    Sunak’s first action (before Covid19) was to reduce entrepreneurs CGT relief by 90%, then he though that taxing people to pay for other people’s restaurant meals was a great plan – now he is putting Corp. Tax, freezing thresholds for income tax, CGT, IHT, Pensions pots… Clear proof that the man is a deluded, anti-business socialist at heart and unsuitable for the job.

    1. Lifelogic
      May 24, 2021

      I see that the CBI has a report out.
      “Seize the Moment: an economic strategy to transform the UK economy”. Full of hugely misguided green lunacy and mainly wrong headed as we have come to expect of the deluded remoaner CBI.

  11. GilesB
    May 24, 2021

    ‘it is a good idea to have a limit on debt interest as a percentage of revenues’ is not practical. The Government always has debt falling due to be repaid – at prevailing interest rates. A sharp spike in interest rates – produced by the market – would quickly blow through any limit on debt interest as a percentage of revenues, unless revenues i.e. tax rates were dramatically increased, which would lead to a decline in confidence in the Government and a further hike in interest rates.

  12. DOM
    May 24, 2021

    The complexity of second by second reality covering trillions of transactions over weeks, months and years make forecasting and recording a pointless exercise and therefore such fiscal rules are mere temporary lines in the sand. The daily tide comes in sweeps the lines away, departs and returns the next day.

    Accept that the State bureaucratic machine is neither omnipotent nor is it omnipresent. Indeed, one could argue it is utterly incompetent and preserves its integrity behind carefully selected pieces of worthless data

    1. Mark B
      May 25, 2021

      Which is why when we were asked what QUANGO we would most like to get rid of I said the OBR.

      To quote and old phrase:

      There are lies, damned lies, and then there are statistics.

  13. Bryan Harris
    May 24, 2021

    Such rules should be based on a common sense approach to using our money wisely. A strict budget should be at the centre of it.

    Certainly beyond time that we escaped EU methodology that was never designed for optimum growth.

  14. Lifelogic
    May 24, 2021

    Long interview on Talk Radio just now with Anne-Marie Trevelyan an energy minister. It seems she went to Oxford Poly to read somthingv after St Pauls and then on to accounting. She actually seems to think the insane net zero carbon agenda will “reduce” people’s energy bills – just how deluded can she be. Does she know the first thing about energy, physic, energy engineering and energy economics? Then she said Boris “literally” threw the kitchen sink at Covid. When and where was that I wonder?

    Nick Timothy in the Telegraph today.

    “If the police accept the idea of structural racism, no one is safe
    Selective law enforcement encourages ‘victim’ groups to reject any rules, corroding social justice”

    He is surely right and this is exactly what the police are doing.

    1. Lifelogic
      May 24, 2021

      Might it not be a good plan to appoint energy ministers who knew at least the very basics of energy engineering and energy economics? Lords Peter Lilley or Matt Ridley perhaps?

      Or was it total ignorance & gender were the main criterion for the job of Energy Minister. This as anyone who knew the subject well would insist on changing the whole insane and suicidal net zero agenda.

  15. Roy Grainger
    May 24, 2021

    They are not really rules are they, they are just vague suggestions with no penalties at all if they are broken. For example when the BoE fails to meet the 2% inflation target all they have to do is write a letter explaining why.

  16. Everhopeful
    May 24, 2021

    Nasty, naughty little old virus did not cause any economic problems.
    That was down to ludicrous govt. response.
    All it ever needed to do was provide a proper health service.
    If there had been one, Johnson could have gone with “herd immunity” ( the old definition) and all would have been well.
    DC is having a field day.

    1. Lifelogic
      May 24, 2021

      Indeed. The first lockdown was perhaps justified by potential NHS overload. But so many of the infections were contracted in hospitals and care homes and when so many NHS patients had been dumped (tested positive and untested) as an idiotic NHS policy. Meanwhile PPE dopes like Neil O’Brien MP were attacking the very sensible Great Barrington Declaration and personally attacking sound and sensible people like Prof Sunetra Gupta and others.

      Now he is talking much drivel about levelling up.

  17. David Brown
    May 24, 2021

    The EU is a powerful trading block 20 miles from the UK.
    To me it does not matter what any UK Gov tries to do, commentators and international analysts will always monitor the UK against the EU.
    My love of the EU is well documented so I am biased
    However in my view it’s almost impossible to be independent of EU influence no matter how hard this Gov tries. Hopefully a future Gov will change this and be more aligned to the EU.

  18. Everhopeful
    May 24, 2021

    Governments operate with other people’s money.
    What right do they have to then make those from whom it was stolen, indebted?
    Ah…well, I suppose that since they are thieves…they just don’t care!

  19. Ed M
    May 24, 2021

    UK needs 1) a Michael ‘O Leary as leader to get UK back into shape, financially (i disagree with ‘O L about Europe but then he cares more about his business than Europe or not) 2) supported by a deputy leader who focuses on campassionate Conservatism to give sense of responsibility and public duty to the young to stand up on their own feet – depending on themselves and their families and not the state and 3) with a Chancellor who focuses on High Tech / Digital sector to increase productivity and high-quality, brand exports and so that we don’t have all our eggs in the economy in the same basket.

    1. David Brown
      May 24, 2021

      Wow some good points I agree with you

    2. turboterrier
      May 24, 2021

      Ed M

      +1 well said Ed

  20. nota#
    May 24, 2021

    ‘Fiscal rules’ – is it any surprise that the rules of good fiscal management are constantly and consistently broken?

    The system is ‘broken’ because like most things the Central Command is, well lets just say ‘immature and useless’. Its a political thing from the top down and is rife in whatever the complexion of those that steel power. To be seen as being as the ‘boss’ the ‘overlord’ you must first make promises, break those promises but keep steeling from people wallets. That’s the point politics in front of good management.

    Lets spend money to keep people quiet! Then we don’t have to enact the Brexit Referendum, we can stay tied to the EU, break up the UK , keep the HoL, give away UK resources(Fish, Energy, Banking, a long massive list) . That way we can be seen to be the ‘good guys’ – ignore the people and ‘blackmail’ them with their own money! How easy is that to keep duping the UK population.

    The HoC collectively and individually has to start reinforcing their purpose, to represent those they serve. That is not their gang leader that appointed them to the ballot paper, it is their voters that placed them there to defend them against what for the most part a ‘rogue’ state.

    1. nota#
      May 24, 2021

      The real point is and it runs through the whole Political/Elite Class in the HoC whatever their persuasion, even with the immense high cost resources at their disposal they just don’t have any managements expertise at the front end.

      Our Governments have been great at disposing our money but never good at spending it.

    2. Mark B
      May 25, 2021

      We need to seperate the Executive from the Legislature with different election cycles.

  21. William Long
    May 24, 2021

    The problem we have is that the Treasury mindset has never left the EU and there are few in the present Government who show any sign of wanting to change that. Maybe Pritti Patel for Chancellor?

  22. Andy
    May 24, 2021

    I read an article this morning by Brexitist economist Roger Bootle claiming Brexitists are free traders because they have thrown themselves on the mercy of Australia. “But Australians are white and speak English” the Brexitists whine. The vast majority of Europeans I know are also white and, ironically, most speak better English than your average Brexitist too.

    Anyway we must call out this Brexitist nonsense. They are not free traders. They are disaster capitalists. They have imposed the biggest barriers to trade we have faced in nearly half a century – imposing masses of new burdensome bureaucracy which is strangling our businesses.

    We will not let these people claim they are free traders. They are not. They are disaster capitalists and isolationists. We will eventually end their pathetic project and we will lock up the perpetrators.

    1. Peter2
      May 24, 2021

      You cried out for a free trade deals with the EU andy.
      Now we have such deals agreed with non EU nations you suddenly don’t like any of them.

    2. graham1946
      May 24, 2021

      I asked you the other day to list the barriers the UK put up against the EU. Answer came there none. You cannot answer because you know nothing. As usual you are like the barbers cat full of wind wind p…

    3. Richard1
      May 24, 2021

      You obviously didn’t read his article. If you did you are mendaciously mis-representing it. Try reading it again.

      What is pathetic is your constant whining about how you would like to lock up anyone who disagrees with you. Are you really an adult?

    4. MiC
      May 25, 2021

      You are absolutely right, that Europeans who have English as a second language speak it better than many Leave voters who have only one.

      In parts of West Yorkshire children from indigenous homes now quite often have to be taught English As A Foreign Language because they cannot understand normal speech as used by their teachers.

  23. turboterrier
    May 24, 2021

    With all the mind blowing amounts of money being spent by government maybe it is time for open book accounting to reassure the taxpayer that money is being wisely spent. A monthly statement on total expenditure from each minister who is controlling departments would help focussing the minds. A good department to start would be the Home Office. How much money is illegal immigration actually costing the taxpayers? If the costs can not be reduced month on month then people not just heads of departments become accountable. The reality is until the waste is actually measured and scrutinised on small time scales then the mistakes remain and eventually get built into the process. Every ISO 9000 COMPANY HAS TO PROVE THEY ARE CONTINUOUSLY IMPROVING THEIR COSTS. Governments departments would and do not meet the criteria.

    1. Fedupsoutherner
      May 24, 2021

      Turbo it would be nice if the public was told the full cost of abandoning ICE cars and the cost of the heating debacle.

      1. turboterrier
        May 24, 2021

        F U S

  24. oldtimer
    May 24, 2021

    The fact that such rules keep chopping and changing suggests to me that they are meaningless except as cover intended for the Chancellor of the day to give the impression that he knows what he his doing and where he is heading. Such attempts at cover have been futile as you point out. The only benchmark worth having is “no deficit”. I use the word benchmark purposely instead of rule. If government spending exceeds income it is failure; if it falls below it is success. Excess expenditure means more taxation (sooner or later); a surplus can be applied to reduce taxation and/or debt. To help this happen there needs to be a revolution in the tax system (a) to simplify it and (b) to reduce the anomalies that are to be found as a consequence of the complexities introduced over the decades.

    None of this will happen because politicians like to buy votes by handing out largesse to their favoured voters and they like inflation because it eats away at past government debts and introduces fiscal drag to screw long suffering taxpayers until the day they die. PS Your suggested 5% interest rule will fall over or be abndoned if or when inflation takes off.

    1. Derek Henry
      May 24, 2021

      Hi old timer,

      Hope you are well.

      It does not work like a household budget.

      If the government spends £10 billion but only collects £9 billion in taxes. Where is the other £1billion ? What’s happened to it ?

      Simple households and business have decided to save some of their income instead of spending it all.

      The budget deficit = the private sector surplus is an accounting fact. When you look at the balance sheets.

      Excess expenditure means more taxation (sooner or later) not true if there is enough skills and real resources to absorb the spending .

      If you cut taxes across the board to zero will that be inflationary ?

      When you run a trade deficit . If you run a government budget surplus – that is collect more tax than you spend that means the private sector will be running a deficit. Spending more than their income and get loaded up with debt.

      The point you fail to grasp is the budget deficit has to meet the savings desires of the private sector.

      If the government spends £10 billion and then collects £15 billion in taxes. Good job trying to meet the private sector savings desires. As more currency is being taken out of the economy than being put in.

      The only time the government should run a surplus is when the economy is at full tilt and there are inflationary pressures everywhere. It needs to take out more currency out of the economy than it puts in.

      Or when it runs large trade surpluses like Norway and Germany.

      Your analysis fails to recognise the simple fact that the government balance , the private sector balance and the trade balance net to zero each and every time . See ONS sector accounts for details.

      If we run a trade deficit and the government runs a surplus then the private sector has to run a deficit. End of story it is how it works – See ONS sector account for details.

      A sovereign national government can run a balanced fiscal position over the economic cycle (peak to peak) as long as it accepts that after all the spending adjustments are exhausted that the private domestic balance will only be in surplus if the external balance is in surplus when averaged out over the same cycle. That is 100% fact !

      On average over the cycle, under these conditions (balanced government fiscal outcome) the private domestic sector deficit exactly equals the trade deficit. As a result over the course of the economic cycle, the private domestic sector becomes increasingly indebted.

      The opposite would be the case if there was a persistent external surplus. Just put UK sectoral balances into google.

      That’s why when Osborne and Hammond slashed the budget deficit to try and run a budget surplus whilst we ran a trade deficit. Household savings ratio (our surplus) was the lowest since records began. It was the lowest since 1963.

      ONS-Quarterly sector accounts, UK:

      Looks what happens to the household saving ratio when you run a trade deficit and a budget deficit at the same time. Households are better off.

      If you say government should run zero deficits at all times whilst running a trade deficit how is the private sector supposed to save ?

      A trade deficit with constant government budget surpluses would be the equivalent of 2008 on steriods! A complete disaster !

      The government balance , the private sector balance and the trade balance net to zero each and every time . Is not some ideological claptrap , or political smoke and mirrors, it is an accounting fact.

      Once again you try to shoe horn your ideology into the gov balance sheets. Which unfortunately is an impossible task because you have never looked at the govt balance sheets once in your life. So can’t see what you suggest = recession.

      Ask George Bush the mess he had to clear up after Clinton’s budget surpluses whilst running a trade deficit. George had to deal with the carnage that it caused.

      What Happened When Clinton Tightened his Belt?

  25. Derek Henry
    May 24, 2021

    Absolutely superb John!

    Makes perfect sense once you understand the balance sheets and the actual accounting that takes place.

    All the budget deficit tells us is how much households and businesses have saved.

    All the national debt tells us how much of those savings were swapped for gilts.

    Replacing these nonsensical budget constraints that were handy when we used fixed exchange rates and the gold standard with an inflation constraint. Is just plain comment sense.

    The amount of savings by business and households does not cause inflation. It is when they come to spend those savings that might and we need to know what the real resource constraints actually are.

    Bravo Sir , bravo !

    The EU fiscal rules were always madness and created so much unemployment time to get rid so tax cuts can be pushed through !

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