A Changed Context
A Track Record of Failure
Fiscal Rules and the Covid-19 challenge
Figure 1 – Adjusted deficit limit forces debt back to anchor if interest rates rise
Meeting the Government's Criteria
- ^ Robert Chote et al., “The Fiscal Rules and Policy Framework,” in The IFS Green Budget 2007, ed. Robert Chote et al., 2007.
- ^ Office for Budget Responsibility, Economic and Fiscal Outlook: March 2013, 2013, https://obr.uk/docs/dlm_uploads/March-2013-EFO-44734674673453.pdf.
- ^ Richard Hughes et al., “Totally (Net) Worth It: The next Generation of UK Fiscal Rules,” 2019, https://www.resolutionfoundation.org/app/uploads/2019/10/Totally-net-worth-it.pdf.
- ^ https://www.ifs.org.uk/publications/14351
- ^ James Browne, “How Far and How Fast?,” 2020, https://institute.global/sites/default/files/2020-07/Tony Blair Institute%2C How Far and How Fast%2C Public Debt After the Pandemic FINAL.pdf.
- ^ Office for Budget Responsibility, “Economic and Fiscal Outlook – November 2020,” 2020, https://obr.uk/efo/economic-and-fiscal-outlook-november-2020/.
- ^ Note that Portes and Wren-Lewis’ target is for the level of the overall deficit, including investment spending. They suggest the government should set a minimum level of investment spending to prevent it being cut to meet the target rather than excluding it from the deficit measure targeted.
- ^ Jonathan Portes and Simon Wren-Lewis, “Issues in the Design of Fiscal Policy Rules,” The Manchester School 83 (September 1, 2015): 56–86, https://doi.org/10.1111/manc.12118.
- ^ Hughes et al., “Totally (Net) Worth It: The next Generation of UK Fiscal Rules.”
- ^ Browne, “How Far and How Fast?”
- ^ Olivier Blanchard, Alvaro Leandro, and Jeromin Zettelmeyer, “Redesigning the EU Fiscal Rules: From Rules to Standards Redesigning EU Fiscal Rules: From Rules to Standards ,” in 72nd Economic Policy Panel Meeting, ed. Federal Ministry of Finance Germany, 2020, https://www.economic-policy.org/wp-content/uploads/2020/10/9100_Redesigning-EU-Fiscal-Rules.pdf?utm_source=RF+Mailing+List&utm_campaign=0ba48e1404-EMAIL_CAMPAIGN_2020_10_16_02_46_COPY_01&utm_medium=email&utm_term=0_c0e8a99f92-0ba48e1404-313001261&mc_cid=0.
- ^ Julian Morgan and Ian Mulheirn, “Whatever the Weather: Future-Proof Budget Rules,” 2020.
- ^ Simple arithmetic shows that in the long run the government debt to GDP ratio will converge to a value that equals the deficit to GDP ratio divided by the growth in nominal income. For instance a country that recorded a permanent deficit of 3 per cent of GDP with nominal income growing at 5 per cent per annum will ultimately achieve a debt to GDP ratio of 60 per cent of GDP (0.03/0.05) irrespective of whether its debt started at 40, 60 or 80 per cent of GDP.
- ^ Formally, we propose that the adjustment is calculated as the real interest rate on ten-year government bonds compounded over ten years divided by the forecast for real GDP growth over the next ten years.
- ^ This idea was first suggested by the IFS; see Robert Chote, Carl Emmerson, and Gemma Tetlow, “The Fiscal Rules and Policy Framework,” in The IFS Green Budget 2009, ed. Robert Chote et al., 2009, https://www.ifs.org.uk/budgets/gb2009/09chap5.pdf.