Think Tanks

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Autumn statement run-up: Reform looks at fiscal rules. The CPS recommends wage and aid freezes - and no carbon price floor

By Paul Goodman
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The think tanks are starting to set out their stalls in the run-up to Wednesday's autumn.  Today, we have a paper from James Zuccollo of Reform on Long-Term Fiscal Sustainability. He says that -

  • Fiscal rules must not allow for creative accounting that keeps some government expenses out of scope, as was the case with investment under the golden rule.  "Essentially, the restriction of the golden rule to the operating balance did not ensure counter-cyclical fiscal policy, nor did it ensure a safe overhead before the debt limit was hit. In addition, the rules granted explicit leeway for the Government to depart from the rules, so long as it gave reasons and provided a schedule for return."
  • Secondly, arbitrary debt targets, such as the sustainable investment rule, provide a false sense of security and should be avoided. Optimal macroeconomic policy will often involve using debt as a short-term buffer to accommodate unexpected shocks.  A more flexible rule allows that to occur while still maintaining credibility. The difficulty, then, is in designing a rule flexible enough to be credible, strict enough to be binding, and simple enough to be easily monitored.
  • Finally, there are lessons from abroad.  Zuccollo cites Switzerland's " 'Debt Brake', requiring a yearly balanced structural budget, ensures that spending growth never eclipses cyclically adjusted tax revenues; Chile and Russia, where "natural resource exports are an important part of economy, so mechanisms are needed to manage large and on-going revenue fluctuations from change in the terms of trade", and New Zealand, which target "a particular operating balance and back[s] this approach with a debt limit."

There is also a recent briefing from Ryan Bourne and Tim Knox of the Centre for Policy Studies.  Three of their main recommendations are:

  • Implement cash freezes to several spending streams. "The Chancellor could freeze all benefits which would usually be increased by the September CPI inflation rate for one year, except for the state pension. He could freeze spending on aid, and abandon the 0.7% of GDP target which has no economic rationale." Finally, the Chancellor should set a clear framework and guidelines for how pay freezes should work in the public sector."
  • Avoid introducing new punitive wealth taxes or council tax bands. "There is scope, however, to embark on a revenue neutral tax reform programme according to the principles of broadening bases and lowering marginal rates, starting with the full merging of income tax and employees’ National Insurance into a single income tax rate (with employers’ National Insurance replaced with a simple payroll tax)."
  • Abandon the unilateral carbon price floor planned for 2013 and "go further in deregulating small businesses and employment law, roll out a framework for ‘sunset clauses’ for new regulations, put forward a new Consolidated Act which rationalises all the 100+ Statutes that impact on planning and development and, in line with Nick Clegg’s recent speech, lay out a framework for new Garden City developments.


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