In a recent letter to The Guardian, a coterie of mainly English academics has criticized George Osborne's Mansion House speech in which he proposed to run a budget surplus in normal times.
According to the letter writers,
I have searched for details on the Osborne plan, but they are sketchy. There is no mention in the speech of 'permanent budget surpluses'. Instead, the Chancellor proposes that the Treasury should run surpluses in 'normal times'. He suggests that the Office for Budget Responsibility, should define what 'normal' means. The OBR may not be the best independent body to fulfill this role, but I can certainly see a role for some independent body to recommend when it makes sense to run a current account deficit.
 |
| Mansion House |
The chancellor’s plans, announced in his Mansion House speech, for permanent budget surpluses [my italics] are nothing more than an attempt to outmanoeuvre his opponents (Report, 10 June). They have no basis in economics. Osborne’s proposals are not fit for the complexity of a modern 21st-century economy and, as such, they risk a liquidity crisis that could also trigger banking problems, a fall in GDP, a crash, or all three.
I have searched for details on the Osborne plan, but they are sketchy. There is no mention in the speech of 'permanent budget surpluses'. Instead, the Chancellor proposes that the Treasury should run surpluses in 'normal times'. He suggests that the Office for Budget Responsibility, should define what 'normal' means. The OBR may not be the best independent body to fulfill this role, but I can certainly see a role for some independent body to recommend when it makes sense to run a current account deficit.
As far as I can see, Chancellor Osborne is proposing to relinquish political control of the fiscal reins in much the same way that Gordon Brown relinquished control of the monetary reins when the Bank of England gained independence in 1997. There is a clear temptation for elected governments to spend in response to electoral cycles and some kind of independent body that keeps that temptation in check is, in my view, a good idea.
Sensible fiscal policy demands that a government should be prepared to run deficits in recessions, but that during normal times, expenditures on non-capital items should be in surplus. Interpreted in this way, the Chancellor's proposal is one that is very much in line with Keynesian economics.
Keynes' views on fiscal policy are summarized in Volume 27 of his collected works, to which I do not have immediate access. The following is a second-hand quote from the article by Brown-Collier and Collier, "What Keynes Really Said about Deficit Spending", published in the Journal of Post-Keynesian Economics.
Keynes' views on fiscal policy are summarized in Volume 27 of his collected works, to which I do not have immediate access. The following is a second-hand quote from the article by Brown-Collier and Collier, "What Keynes Really Said about Deficit Spending", published in the Journal of Post-Keynesian Economics.
Keynes distinguishes public investment, which he wants to be chosen on a cost-benefit basis, from current expenditure, which should not be financed from deficit spending.
Lets not judge the Osborne plan before it is fleshed out in more detail. Running a surplus in normal times is, after all, an essentially Keynesian proposition.