There are many people who believe gym membership alone will make them fit. Similarly, the Labour government seems to think that signing up to a framework of fiscal rules automatically brings budgetary prudence. Yet, in recent years, the government has shown less enthusiasm for making its spending meet its rules than making its rules meet its spending. That is like worrying more about paying the membership fees than spending time on the exercise bike. And now, however, the looming downturn and consequent deterioration in the public finances are set to expose the failings. But fiscal discipline is vital so new rules are needed.
The current rules are designed to enforce two principles. First, future generations should not pay for today’s running costs. The “golden rule” states that, measured over an economic cycle, current spending should be met from current taxation. The Treasury should borrow only to build new roads, schools and hospitals. Second, the government should not leave ever-increasing debt repayments for future generations; the “sustainable investment rule” insists that net debt must not be higher than 40 per cent of gross domestic product.
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