Did they break the fiscal rules? |
Given the severe financial pressures that many countries face including our own, there is a pressure on economies to adhere to self imposed fiscal rules. Examples of these include trying to ensure that the national budget deficit does not exceed a given percentage of a country's annual GDP or a country tries to balance its budget over a period of five years ( the approximate life of a UK parliament). These rules are usually self imposed but governments find it very difficult to stick to them. In the last Labour Government Gordon Brown instituted a "Golden Rule" where he would only borrow to invest over the life of an economic cycle. This rule was also broken when push came to shove.
In Europe,economies running deficits larger than 3% of GDP were supposed to trim their structural deficits by 0.5% of GDP per year or face fines from the European Commission, but this has never happened yet and indeed the lack of any such enforcement has probably contributed to the debt crisis Europe now faces. So is there any point having these rules if they are going to be broken?
According to an IMF study quoted in the Economist there appears to be a point to these rules:
"An IMF analysis in 2009 of 24 large fiscal adjustments since 1980 found that it helped to have formal budgetary constraints. Economies that already had rules in place slashed debt levels by nearly 30% of GDP on average. Countries that adopted new rules as part of their adjustment cut debt by 39% of GDP. Those with no rules at all managed a reduction of only 20% of GDP."
So even if fiscal rules were sometimes broken it was,on balance, better to have them, in terms of trying to reduce debt than not having any rules at all. Perhaps we do need to try and make rules more flexible in dealing with world shocks like the Japanese Tsunami -- but not having them at all appears to be worse.
Fiscal discipline, determined by internal criteria,however imperfect, at least acts as some sort of bulwark against accelerating national debt levels.
They are certainly here to stay at least for the foreseeable future.
http://www.economist.com/node/18679299?story_id=18679299
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