Economists never agree on anything, right? Sometimes not even with themselves: President Truman famously asked for a one-armed economist because he got so fed up with them saying ‘on one hand this, but on the other hand that’.
But hang on. Pretty much all of them agree that Britain’s economy is structurally, permanently lopsided. We depend too much on consumer spending, and we don’t save or invest enough for the future. We’re like the grasshopper in Aesop’s fable, living for today rather than putting something by for tomorrow.
And the moment to fix the problem, changing ingrained habits and rebalancing our economy, is now. Because, after eight years of belt-tightening and sacrifice, Government spending is nearly under control. We’re living within our means. Taxes and spending are balanced, for day-to-day essentials like police, health, schools and defence at least.
So which way will we go? Will we go back to that structurally lopsided, grasshopper economy? Or take this rare, once-in-a-generation moment to look ourselves in the mirror and sober up?
The answer is pretty obvious. We’d be mad to throw away the hard-won gains of the last eight years. But how do we deliver it in practice? How do we make sure we can’t slip back into bad habits?
The answer is a fiscal rule: an Act of Parliament to make sure that the Government’s day-to-day budget is always balanced. Governments would still be able to borrow for long-term investments in economic infrastructure such as fibre-optics, roads or rail. But everything else; the day-to-day spending on things like health, schools, police or defence, has to be paid through your and my taxes.
The power of a fiscal rule is that it forces Governments to make sure we only live within our means. If they don’t, then citizens can take Ministers to court, and the figures are independently audited to make sure they can’t be fiddled. The good news is that the Government gets it: Liz Truss backed the idea of a fiscal rule in her recent speech at the LSE.
This matters, because it would mean an end to boom and bust, for the Government’s finances at least. We would have a stronger, more predictable, stable foundations for wealth-creating investments in new jobs and technologies. Public spending on things like health, schools, police or defence could increase steadily, rather than in stop-go cycles. And we’d pack a stronger punch internationally too.
And, because governments would have to put something aside when the economy was growing, we wouldn’t have to borrow our way through the next recession. We’d create an enormous national ‘rainy day’ fund which we could use to start a British sovereign wealth fund, like the Norway’s extremely successful version. It would transform Britain’s economy, and society, at a stroke.
The effects wouldn’t only be economic either. We’d make Britain a generationally fairer society, because borrowing to pay for the day-to-day spending which improves our lives today just pushes the bills forward in time, so our children and grandchildren have to pay them instead of us. That’s morally wrong, and a fiscal rule would force us to stop it immediately. We can’t expect future generations to pay our IOUs.
And on that, at least, even the economists might agree. It’s great idea and the Government should do it now.