Monday, 24 November 2008

Credibility check

One of my themes in the last few weeks has been the credibility of UK fiscal policy and how it can be rescued now that the rules of the last ten years have been clearly broken.

If your husband has an affair, before you believe his assurances of renewed fidelity, he needs to give you a good reason to think it will be different next time. If this is his second or third sin (after those drunken incidents in the 1970s and early 90s) he needs to be extra convincing. Alistair Darling is in the same position.

So how will today's announcements go down? Will anyone believe them? There are five criteria it has to meet to be credible.

The first step is that it must have content - there needs to be something concrete to actually believe. Something simple that nobody can forget. "I will never see that woman again" is a good one, and "We will reduce borrowing every year and eliminate it by 2015" comes in a reasonable second place. Marks: 4/5

The second is to make it plausible. If "that woman" is your business partner then your promise never to speak to her again is unconvincing. Against this benchmark, a six or seven year timescale is fairly believable. Reducing the deficit by 1.3% per year (from 8% in 2009-10 to 0% in 2015-16) is tight, but seems achievable in the abstract. Pre-announcing future tax rises makes a big difference to this (Lucas's work on rational expectations would say otherwise, but I believe that argument is flawed). However the target relies on no more recessions in the next seven years. Marks: 4/5

The third is to have a way of monitoring compliance. You would probably check the lipstick on your husband's collar very closely for the following months. There was some talk a few weeks ago of creating an equivalent of the US's Congressional Budget Office, which would independently monitor the government's figures. But this element seems to be missing - unless we can rely on the economics press to keep a very focused eye on the fiscal balance, and the government to open its books to some extent. Marks: 2/5

The fourth is that it should be robust to future changes. Your husband doesn't know which gorgeous harlots he'll meet at his next networking event, so his promises need to take this into account. Can Darling meet these commitments if the downturn is longer than expected (he projects growth from the third quarter of 2009), if public spending overruns or if tax revenues undershoot again? They should have some correcting mechanism built in. This is one of the benefits of a simple, measurable target - there is moral pressure to meet it even when you have an excuse for failure in some of the underlying targets. So Darling should be held accountable for the deficit as a proportion of GDP regardless of the performance of the underlying figures. He does have several levers to control this - so that if tax revenues fall, public spending can be cut in turn. And the growth of the economy will automatically help. So on this factor, it's believable. Marks: 3/5

The fifth is that you need to believe he really wants to change. If your husband is making excuses but actually shows no remorse, he will probably stray again as soon as your guard is down. So on this criterion does Darling measure up? Well, despite some of the cries from the galleries I think he does. He and Brown have their future reputations riding on fixing this problem, and I believe that's as important to them as winning the next election. What's more, I think they (and most politicians) are genuine public servants and care about improving the world they live in. Darling and Brown are both intelligent people, capable of learning from the effects of the previous policy and coming up with an improved version next time. Am I too optimistic? I hope not. Marks: 5/5

Total credibility score: 18/25 or 72%. I'd like to have seen more, but I'll take it.

Update: Chris Giles, economics editor of the FT, has a slightly different take on the issue here. Scroll down to the last section ("Is the Treasury's plan credible") for the relevant comments.

5 comments:

Anonymous said...

You're optimistic. How accurate have the govt. growth forecasts been in the last 3 years?

Leigh Caldwell said...

Fair question, but in the period before that the Treasury had a better forecasting record than the consensus of outside economists. On balance their forecasts are probably as good as anyone's, though it is easier to spot the undershoots than the overshoots.

CityUnslicker said...

What sort of 'change' do you mean they can have 5/5? They clearly have no idea what to do and are producing new rabbits out of the hat on a monthly basis - this is not a good thing surely?

They have taken back to the 70's. there are even going to be power cuts before too long.

David said...

"Reducing the deficit by 1.3% per year (from 8% in 2009-10 to 0% in 2015-16)" -

I think Darling wasn't referring to eliminating the deficit entirely, and that under the preferred Labour 'borrowing to invest' measure a balanced budget for 2015-16 would still include approx £50-55bn of borrowing - i.e. about 3%.

Should make it a bit easier to achieve - after all they need all the help they can get after getting into this mess!

Anonymous said...

THis Government's track record - in ANY area of policy, not just finance - does not hold much grounds for hope. It is very difficult to see ANY success - only confusion, muddle, gross profligacy, unintended consequences and failure. Name one success free of any of those.