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The fiscal charter media fiasco

This article originally appeared on the Simon Wren-Lewis Mainly Macro blog on Thursday 15 October

The House of Commons passes into law a fiscal charter which enshrines in the short term another period of severe austerity, and thereafter commits the government to a crazy fiscal rule. The media (with one or two notable exceptions) focus on Labour U-turns and 20 odd abstentions. The Labour leadership have only themselves to blame of course. Which given the way the media operates is true. But does it have to be this way?

Behind the gimmick of a charter is a real policy that will impact on everyone. This policy is the reason the government will make substantial cuts to tax credits for millions of poorer working people, making their already difficult lives substantially harder. George Osborne said as much in his budget speech. Would these people really think that this was of less interest than endless discussion of Labour embarrassment? Who are television news programmes made for: ordinary people who receive tax credits or a Westminister bubble obsessed with political process?

The charter is all about macroeconomics: fiscal policy and fiscal rules. There is an academic literature on fiscal policy and fiscal rules. I have not come across a single non-partisan academic economist who supports this charter, and certainly not one who knows about this literature. For an academic discipline that is always accused of being hopelessly divided, that is saying something. The reasons are not that difficult to get across:

  • The policy restricts public investment at just the time that public investment should be high because borrowing and labour are cheap. Its a near universal view among economists that now is the time for higher public investment.
  • Targeting a surplus year in and year out is likely to lead to harmful volatility in tax rates or spending. All macro theory says the deficit in the short-term should be a shock absorber.
  • If the charter is achieved, it will bring debt down ridiculously fast, penalising the current working generation.
  • Fiscal austerity when interest rates are very low is never a good idea

Again with the exception of a few newspapers, I heard nothing of this in media reporting. Instead I heard misleading statements, like you needed surpluses to get debt down when what matters is the debt/GDP ratio. (2% deficits with normal growth will reduce the debt ratio.)

Even the ‘highbrow’ news programmes like Channel 4 news and Newsnight chose to spend most of its time talking about U-turns on either side. No mention of the complete lack of economic support for this charter. On an issue with such important consequences, is that fulfilling a duty to inform?

We have millions of hardworking but poor families who will be made substantially worse off as a result of a fiscal rule which no academic economist has supported. Will these families ever find that out? What does that tell us about our media, and our democracy?