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29 Nov 2020 - Press release on fiscal principles for the future

“Fiscal principles for the future, by Gerard Lyons, Graham Gudgin, Warwick Lightfoot and Jan Zeber”


Pro-growth policy

Policy Exchange, the think tank, has called for a pro-growth economic strategy as the best way to address Britain’s fiscal position.

The report, “Fiscal principles for the future”, is co-authored by Gerard Lyons, Graham Gudgin, Warwick Lightfoot and Jan Zeber, and is released Monday 30thNovember, 2020.

Gerard Lyons, Senior Fellow at Policy Exchange, stated, “It is right to use fiscal policy as a shock absorber, to avoid premature tightening and to direct spending towards capital investment and public services. The main focus has to be on a pro-growth agenda, that reduces unemployment and allows the economy to recover.”

He also stated that, “Although the ratio of debt to GDP is set to rise in coming years this should not prove onerous to service by historical standards and can then be reduced gradually over time.”

Long dated debt

The Report calls upon the Chancellor to, “Take advantage of crisis levels of yields to issue very long-dated debt and to help fund the National Infrastructure Bank (NIB) through new NIB bonds.”

Ten principles for future fiscal policy

The Report advocates adopting ten principles to govern future fiscal policy. The UK has had a of fiscal rules over recent decades. All have been unveiled with varying degrees of fanfare by different Chancellors but none have stood the test of time. The UK needs to avoid fiscal rules that both lack credibility and impose unnecessary constraints on future policy. In a similar way, political commitments to not raise taxes or to commit to pre-set spending targets, often made in election campaigns, can impose unnecessary constraints that lack economic credibility. Instead, Policy Exchange advocate some fiscal principles. As Lyons stated, “These should allow maximum flexibility for policy while allowing a credible policy framework that is clearly understood.” These principles include,

Principle 1: Governments should aim for the public finances to be in good shape to cope with future shocks

Principle 2: Fiscal flexibility is necessary

Principle 3: Fiscal policy must be judged in the context of the time

Principle 4: Take advantage of low borrowing rates to fund the deficit with debt of as long a maturity as possible

Principle 5: Avoid pro-cyclical fiscal policy

Principle 6: There should be a focus on debt and debt servicing in the present time

Principle 7: There is a need for consistency between fiscal and monetary policy

Principle 8: Decisions on tax and spending should be based on what is best for economic growth

Principle 9: The Government’s balance sheet matters

Principle 10: Avoid a debt trap

The Report examines the detail behind the spending plans

In the Report, Jan Zeber, Deputy Head of Economics at Policy Exchange, examines the fiscal arithmetic highlighting the lower cost of debt servicing as well as its growth trajectory.

Warwick Lightfoot, Head of Economics at Policy Exchange, in discussing public expenditure in a historical context, states that, “Advanced economies have increased public spending to the point where their marginal benefits do not match the cost of resources deployed.”

In his analysis of the OBR’s forecasts, Dr Graham Gudgin, Chief Economic Advisor at Policy Exchange, notes, that, “What the OBR does not say explicitly is that a high proportion of the government debt will be held by the Bank of England’s Asset Purchase Facility (APF) and hence within the public sector.”

Dr Gudgin notes that, “The OBR always assume a return to a long-term trend over three or four years, but in this case they assume that the long-term trend has itself been undermined by so-called ‘scarring’. This may or may not happen and measures should be taken to offset potential scarring.”