UK fiscal rules

Like many countries, the UK has fiscal rules. In general, fiscal rules should aim to ensure fiscal sustainability and inter-generational fairness, while helping to promote longer term societal goals such as high potential growth and the transition to net zero.rnrnThe UK has three fiscal rules: public debt/GDP ratio to fall five years ahead, fiscal deficit below 3% of GDP five years ahead. And an expenditure rule constraining welfare spending. But these rules don’t really achieve their purpose. They fail to ensure a sustainable fiscal policy. The rolling five year targets only require the government to state it intends future fiscal restraint, such that the OBR projects these targets will be met five years ahead. A year later, the government can simply roll forward its intentions to cut the deficit and debt to horizon that remains five years ahead without actually doing anything to achieve it.rnrnMoreover, rules that at best stabilize or reduce slightly public debt ratios in normal times leave inadequate fiscal buffers for adverse shocks. Second problem is that the fiscal rules discourage capital investment, even if this harms the fiscal position and economy over the long term, while failing to achieve intergenerational fairness. Third, the rules have no escape clause for when monetary policy is constrained by the effective lower bound.rnrnThe solution? I propose three fiscal rules: to improve public sector net worth over a five to 10 year horizon; to aim for a cyclically adjusted current balance; and to cut public debt on a three year horizon. There should also be an escape clause to allow greater flexibility if monetary policy is seriously constrained by the effective lower bound. Changes along these lines would help ensure medium term fiscal sustainability, while allowing more scope to lift public investment as part of a comprehensive strategy to raise the UK’s potential growth.rnrnThank you.