Last night, the Fiscal Charter, blogged about yesterday and the day before, passed in Parliament. Aside from the politics of Labour’s stance on it, the essence of this charter is that governments must run budget surpluses (so tax receipts must be higher than government spending) in the economic “good times” (defined as real GDP growth of less than 1% a year, as measured on a rolling four-quarter basis).
This is far from the first set of fiscal rules devised by a government or governments; Gordon Brown famously had his golden rule of only borrowing to invest over “the cycle” – so balance the current budget (spending on current consumption like on benefits), but allow borrowing for public infrastructure projects, while the eurozone has the Stability and Growth Pact, which limits deficits and debt levels of eurozone members. Brown’s rule was never enshrined in law, of course, but this need not make a particularly large difference since it’s not at all clear how any deviation from the fiscal charter would be punished, should it happen.
However, the main thing I want to write about this morning is a message we often hear, namely that Britain must “live within its means”. It is simply another way of implying that governments have to be like households, but yesterday I talked about why, outside the eurozone and provided a government can borrow in its own currency, that’s not a useful comparison.
One’s own means include its credibility as a debtor; are we expected to repay debts we incur? Because the vast majority of households in the UK take on gigantic mortgages at some point in their lives, many multiples of the size of their income, but do so on the basis that they will be able to pay off that large loan over a long period of time: they are credit-worthy. If a government can print its own money and borrow in that currency, then it is creditworthy – it will be able to pay back, even if the resulting money is worth less due to inflation.
Hence living within one’s means need not mean running a surplus and never borrowing, just as it doesn’t mean that for a household. More next term…