We move, in this second part of my review of Simon Wren-Lewis’s economics blogs on the budget, away from economics and onto the presentation of the reasons for tax increases, where Wren-Lewis contends that the government needs to make sure that it frames the discussion to suit its own purposes. Labour needs to talk about public services rather than balancing the books.
Improved public services
Inevitably there will be tax increases and the emphasis has to be that these are to finance the recovery of distraught public services, rather than to fill a £22bn hole left by Jeremy Hunt as chancellor. The obvious downside of talking of the need to fill a financial black hole is that it is miserabilist. ‘Improved public services’ is more upbeat, positive and likely to gain more traction with the general public.
Labour has a good case that the Conservatives mismanaged the economy over a 14-year period. However, much of the UK media is of a right-wing disposition and will continue to espouse the century old ‘Treasury view’ that running the UK economy is just the same as running a household budget. Economist John Maynard Keynes totally demolished that myth and now Wren-Lewis’s Mainly Macro blog follows in his footsteps.
Indeed, in 2018 Wren-Lewis re-published updated versions of some of his best blog pieces as a book, under the title, ‘The Lies We Were Told’. As part of it, he coined the dismissive term ‘mediamacro’ to express his contempt for that part of the media that acted as cheerleaders for the excessively market-orientated, small-state economics of Tory chancellors.
Despite Labour currently having right on its side in this argument, Wren-Lewis’s strong advice still remains that the framing of Labour’s justification for tax rises should be in terms of “restoring our public services”.
Fiscal rules: how to make them and when to break them
For anyone wanting to get a handle on fiscal rules, Wren-Lewis offers a very useful introduction. Fiscal rules are devised by governments and are self-imposed. Governments are headed by politicians who have gained power and will want to win the next election. There is a temptation in the run up to a ballot to cut taxes and increase spending (opening up a current deficit and adding to debt) because lower taxes and better services win votes. But there will be a later price to pay.
To avoid this temptation, a government might set itself fiscal rules relating to the balance between income and expenditure. It is akin to the 35-year-old man in danger of being overweight and unfit, who sets himself limits for his eating and drinking, and specifies a minimum frequency of gym visits. It takes self-discipline to stick to the regime – and governments have been known to game their own rules – or to simply junk them when it does not suit.
If all governments were benign, with a Keynsian (arguably ‘correct’) understanding of how the economy works, and if all actors shared that view and were highly informed, then fiscal rules would not be necessary. Fiscal rules exist because of the imperfections of the real world (including what Wren-Lewis refers to, for example, as the problem of “low information voters”) and the tendency for many voters and large parts of the media to think that the government budget is simply the household budget writ large.
Is government debt a bad thing?
Such an analogy is false because it is wrong-headed to require government debt to be falling as a percentage of GDP. Such a requirement implies that ‘government debt is bad’, whereas it might be hugely beneficial. If the government has run up debt in order to invest in public infrastructure from which the public derive significant benefit, then so be it.
However, permanently growing deficits are an unsustainable fiscal stance to be wary of. Governments have abused Keynesian policies and engendered ‘deficit bias’ that, in the long run, becomes unsustainable. Hence Wren-Lewis asserts that it is more appropriate for fiscal rules to target deficits rather than the stock of debt. For instance, as president Donald Trump cut taxes and increased spending. He reaped the short-term benefit of popular acclaim whilst bequeathing to the Biden administration the problem of reining in the burgeoning total deficit. A fiscal rule, strictly adhered to, would have prevented this. (But when did Trump ever respect the rules?)
Deficit finance has been used by nations in recent years to deal with crisis situations, such as the global financial crash and the Covid crisis of 2020-21. Allowing fiscal rules to prevent that deficit spending in those exceptional cases would have had catastrophic effects, which is why Wren-Lewis advocates:
“Public investment that benefits future generations… (with the added benefit that this will boost future GDP) or spending in a recession which is essential for Keynesian reasons (where interest rates are unusually low). Often it is responsible to deficit finance and irresponsible not to, which is why fiscal rules have to be more sophisticated than simply always balancing the budget. Anyone in the media who thinks this complexity just represents loopholes for the government shouldn’t be commenting on fiscal rules.”
Time to alter the fiscal rules?
What seems to emerge, in Wren-Lewis’s view, is that deficits and debt are a “second-order problem”. Deficit spending might lead to higher rates of interest than there otherwise would have been, but Wren-Lewis sees this as being less of a problem than climate change – which is manifestly a “first order problem”. Put another way: heavy government expenditure to deal with the climate crisis may be justified even if an increased deficit causes interest rates to rise.
It remains to be seen whether Rachel Reeves will seek to alter the fiscal rules, and, if so, whether this will create sufficient government budget for tackling ‘first order problems’. If Reeves focuses on debt reduction alone, she may be missing part of the bigger economic picture. And if the government in turn cannot convince the country that a continuing financial squeeze is in the interests of public service benefits, they may struggle to achieve that much-needed second term.
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