I've argued previously that the Conservatives have tended to get themselves into all kinds of unnecessary tangles over tax. Unfortunately we are in the process of doing so again.
George Osborne has developed the very effective charge against Gordon Brown that he failed to mend the roof whilst the sun was shining, and the rains have come and we're in trouble. Cameron tells us that he'd like to be able to cut taxes but the cupboard is bare.
Now, there's a difference between these two statements. And it is important. For though George Osborne tends to apply the sunshine-roof statement to fiscal policy, and to use it to suggest that the problem is Brown's excessive expenditure rises and public debt culture, even if we didn't think that was quite correct understood literally, we might nonetheless feel that there was something in it - that Gordon Brown has failed to leave Britain in as good a position as she should have been to deal with a downturn. I think the challenge we have offered the government on this point is right and effective, even though I don't think that the point is really one to do with fiscal policy per se, so I haven't felt there was any point in complaining. It was too complicated to explain why it was true in a wider sense even if it wasn't true of fiscal policy, and it would have been petty and pedantic to challenge what we were saying there.
But now matters have unfortunately moved on, and I think that our earlier error runs the risk of taking us into a blind alley with potentially serious policy consequences. I shall explain.
Gordon Brown has made much of his "fiscal rules" - specifically the "golden rule" (that over the economic cycle, the Government will borrow only to invest and not to fund current spending) and the "sustainable investment rule" (that debt is kept at a "prudent level", interpreted to mean 40% of GDP). These rules have almost no intrinsic merit of their own - as I have argued before - and have had almost no credibility for years (with macroeconomic cycles apparently changing at will in order to maintain the rules, and at one stage the credibility of the macroeconomic framework supposedly depending on the precise accounting definition of roads maintenance!). They have long been an embarrassment to the Treasury, rather than an assistance or a transparency device, but Labour has been stuck with them.
With Northern Rock, the fiscal rules were broken last year even on the government's own flexible definition. With the economic downturn, in the coming two years running up to the election, these rules are going to be toast. Now, since they were daft enough to commit to this framework, and shameless enough to condemn the Conservatives for alleged fiscal irresponsibility when we ran a fiscal deficit of some 8% of GDP in the early 1990s, Labour have little room for manoeuvre on fiscal policy. They probably ought to be cutting taxes, even so, at this stage in the economic cycle, as we did in the early 1990s, but to do so would take them well outside the framwork they have adopted and into the territory they have condemned. So, to be sure, Labour and Alistair Darling have no room for manoeuvre here.
But why do we feel constrained by Gordon Brown's ridiculous (and widely ridiculed) fiscal rules? If we were in government, and had not previously tied ourselves up in knots with silly unfunded tax cut promises and later over-compensating comments about "never putting tax cuts ahead of economic stability", what would we be aiming to do on fiscal policy, given the situation we are in? I can tell you: we would be cutting taxes, temporarily, to try to offset some of the effects of economic downturn. It simply isn't true that we have no scope to do this (and precisely the fact that it isn't true is one of the daft things about Gordon's fiscal rules). Even setting aside arcane statistical debates about definitions and about the status of Northen Rock, UK debt to GDP is almost certainly less than 45%. The Eurozone average is well over 60% - some half as much again as ours, and Italy and Belgium have debt to GDP twice ours, yet manage to sell government bonds just fine. There would be nothing at all to stop us running fiscal deficits of 8% or 10% of GDP if we thought that were useful, and in the recent past we have thought such a policy useful. (Sure, we may have a larger structural fiscal deficit than in the rest of the Eurozone, but that's a long-term issue and wouldn't stop us from a temporary tax cut.)
Personally, I'm very dubious about whether running a big tax cut to fund a big budget deficit at this stage, US-style, would really achieve much (for technical nerds, I tend to favour Ricardian equivalence theories). But perhaps next year, if things seemed to be going really badly, there might be a case for trying it - especially if doing so allowed us to raise interest rates to fight a growing inflation problem, or at the very least limited the need to cut.
The truth is that, when it comes to fiscal policy, for the UK economy the cupboard is not bare. We could cut taxes, temporarily, in the face of an economic downturn, in the standard way that standard economic theory recommends. Our public finances do allow this, contrary to billing. It is only Gordon Brown's daft fiscal rules that prevent it. And it is unfortunate that we have allowed ourselves to be sucked in by them.