The last few days have seen the UK Chancellor George Osborne and Ed Balls try to out-do each other in promising a fiscal surplus. Labour have also put on the table the proposal to bring back the 50% income tax rate which has sparked the usual shallow exchanges about fairness and enterprise.
I find this unedifying. What I would like is that the two of them try to out-do each other with the extent to which they promise to think hard about the optimality of fiscal policy, and for promises about things to spring from that analysis, not from political imperatives. It might sound hopelessly naive to wish for this. But you might have condemned people wishing for something as anodyne and gentle as the Office For Budget Responsibility as hopelessly naive a few years ago.
By ‘the optimality of fiscal policy’ I mean things like: what is the ideal target long run debt to GDP ratio? How high could we safely allow it to go without threatening fiscal solvency, and therefore how generous and counter-cyclical can the response to recessions be? What institutional provision might we need to make sure that fiscal policy can max out when interest rates hit the zero bound? (For example, could some commitment be made for fiscal stabilisers to be designed in concert with the MPC in such circumstances?) How frequently should the fiscal pocket be able to fork out for a banking sector recapitalisation? What is the evidence on the effect of high marginal tax rates on high earners’ incentives? How much inter-generational risk-sharing can our democracy sustain, and how much is appropriate? There are lively debates going on in all these literatures, but the national conversation here never seems to make reference to any of them. Who are the parties consulting about these proposals? Certainly [and perhaps advisedly!] not me. Why aren’t there policy documents making contact with the bodies of academic research on these questions? One might observe that it is early in the electoral cycle to have fully fledged and academically sounded fiscal frameworks. But, really, we have had decades for the parties to get serious about this.
The now discredited Alan Greenspan coined a definition of price stability that involved people no longer talking about inflation. I yearn for a more settled fiscal regime, an analogous fiscal stability, when people no longer talk about tax changes. I guess that is a long way off. But at least one might strive for a world where such changes spring from new insights into the feasibility of stabilisation and redistribution policies, rather than what goes down well with the local party activists.
Update: My one time colleague at the BoE Malcolm Barr, now at JP Morgan, cautions me to be sceptical about the FT story that prompted this blog.