Magazine article Public Finance

Fiscal Rules KO

Magazine article Public Finance

Fiscal Rules KO

Article excerpt

Those who feared that the government was about to embark on a reckless spending spree may now sleep safer in their beds. Alistair Darlings newfound devotion to Keynesian economics apparently has its limits. As the chancellor made clear in this weeks Mais lecture, he won t be adopting a Viv Nicholson 'spend, spend, spend1 approach to public handing.'

Keynesian discretion will be constrained over the medium term through a new set of fiscal rules. The old fiscal framework had worked well but it would be 'perverse, Darling claimed, to adhere to this in the current financial climate.

It was an embarrassing reversal for both the chancellor and the prime minister, and yet it was hardly unexpected. The rules have been in terminal decline for some time and the recent economic turmoil presents an ideal justification for adopting a new philosophy.

But it's crucial that the new rules, to be announced in the Pre-Budget Report, are pitched at the right level.

If Darling and Gordon Brown get this wrong they could end up with a long and deep recession and an unparalleled borrowing legacy to remember them by.

The good news is that there is room to manoeuvre. …

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