Decisions over government borrowing should be taken away from politicians and put in the hands of independent experts to restore confidence in the UK economic framework, a think-tank paper says today.
A new Fiscal Policy Committee should set an overall budget for the government, determining how big a surplus or deficit it can run, much as the Monetary Policy Committee sets interest rates, according to the Social Market Foundation.
In a paper published today, Aveek Bhattacharya, the SMF’s research director, argues that taking some of the politics out of fiscal policy decisions, and allowing them to be driven purely by economic considerations, would lead to higher growth.
The SMF paper comes as some economists worry that market confidence in the UK government and economy has been permanently damaged by the current government’s fiscal choices and disregard for economic institutions such as the Bank of England and the Office for Budget Responsibility. (See Note 1)
The SMF urges Government to set up a “fiscal referee” – a Fiscal Policy Committee (FPC) that would set the government budget and tell them how much they can borrow.
According to the SMF plan, the Chancellor would then be left to decide how to meet the targets and rules set by the FPC.
Crucially, politicians would retain power over the balance of taxes and spending. So if the FPC recommends an additional £10bn of borrowing to stimulate the economy, it would be up to ministers to decide to use that money for spending or tax cuts.
Since 2010 there have been 14 different fiscal rules under the various governments, and the SMF argues that they are set by “political considerations over economic ones” and governments have a tendency to “chop and change their fiscal rules to make them easier to meet”.
Over the last decade, the Bank of England has been “led” to pursue unconventional measures such as quantitative easing because governments have not appropriately responded to encourage demand by making tax cuts or higher spending. The SMF’s research shows that there is growing consensus among experts on the need for fiscal rules to be independently decided, so that it can be depoliticised and work in tandem with decisions by the Bank of England.
Aveek Bhattacharya, SMF Research Director, said:
“The case for taking the politics out of fiscal policy has become more urgent and powerful as the government seeks to regain the trust of investors and the bond markets.
By allowing experts to set it an overall budget, the government could avoid the sort of damaging conflict with the Bank of England we have seen, with fiscal and monetary policy pulling in different directions.
The current situation calls for drastic measures: we should take this opportunity to establish a new system that allows us to restore credibility in UK economic policymaking and try and secure greater stability in the years ahead.
Not only would devolving fiscal policy to experts lead to better policy outcomes, it would also encourage politician and democratic debate to focus on more fundamental economic questions, such as how to improve innovation, productivity and investment in a sustainable and equitable way.”
- For example, JPMorgan Chase & Co suggesting this episode could leave a “permanent scar” on the country’s fiscal reputation, radical measures may be necessary.iv
- The SMF briefing paper, Full Fiscal Autonomy, will be published at smf.co.uk/publications/full-fiscal-autonomy/ on Monday 17th October.
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