Ruling out ruling out [changes in taxes and spending]

Karl Whelan commented on Twitter, after the ‘ruling out’ tax change competition was replayed on Newsnight, that this might be the worst general election campaign ever.  I think he and I are too young to comment on that authoritatively, but it captures the mood.

Hear this!

The deficit, taxes and spending should all be set as a function of the state of the economy.  Automatic stabilisers – the tendency for the deficit to rise in recessions even as tax rates and welfare policies don’t change – are likely not enough to achieve the government’s macroeconomic aims.  Most certainly in the near future, as the economy is still trapped at the zero bound.  Monetary policy would struggle to loosen, so the deficit may need to rise by more than these stabilisers imply.  And if the MPC were to realise belatedly that they had overcooked loose policy, and the Sentance club were proved right, a fiscal tightening might be needed too.

Ruling out changes in some important tax rates [like VAT and national insurance contributions] places all the burden of macroeconomic stabilising actions on those instruments that remain.  And this probably means more pain for most people.

And this is the part that the parties are not saying.  The ruling out arms race is a cynical one conducted with the view that people won’t realise what the consequences are.  If the ruling out is stuck to – another moot point – revenues will have to be raised from somewhere [unless deficit rules are broken, entirely possible], and, in aggregate, that somewhere is the same pocket supposedly protected by the ruling out.  What a mess.

Right now, the guardians of our fiscal framework – which includes the opposition and the incumbent Coalition Government – should be taking great pains to nurture credibility and transparency.  We are still stuck at the zero bound.  We may yet require many more years of chunky deficits to help clear it, or to respond to another, perhaps Eurozone-induced, banking crisis.  This ruling out trickery does the opposite, and is a way to harvest votes based on not being frank with the voters.  It corrodes the credibility which preserves the room for manoeuvre should more fiscal activism be required.

A tolerable form of ruling out would be to write down a coherent framework for monetary and fiscal policy, including highly activist discretionary fiscal policy when we are at the zero bound, and to rule out messing with this.

Otherwise, ruling out should be ruled out.

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