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A More Cautious Approach To Public Finances Will Help To Limit Future Risks

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http://www.independent.co.uk/news/business...ks-1786977.html

Running the economy is no easy task. Sometimes, I get the impression that policymakers think there is some magic formula which, once unlocked, will allow strong growth, low inflation and full employment to continue indefinitely. But for chancellors and governors past, present and future, there is no simple answer.

Under the last Conservative government, an inflation target was introduced. Inflation had been the main bugbear of the UK economy for many years and there was, understandably, a strong sense that its removal would, once and for all, put the UK economy on the straight and narrow. Following their election in 1997, Labour's leaders cemented Britain's anti-inflation credentials by making the Bank of England independent, an apparently revolutionary idea even though other countries had lived with independent central banks for many a year.

With monetary policy now de-politicised, it was easy to be seduced by the idea that there would be "no more boom and bust". Certainly, there was a sense that the control of inflation would unlock the secrets of economic stability. In a speech to the Society of Business Economists in 2007, Mervyn King, the Governor of the Bank of England, said "the main challenge facing the MPC is to keep doing whatever is necessary to keep inflation on track to meet the target". The subtext of this statement is obvious: if inflation is kept under control, economic instability should be kept to a minimum. Given what followed, it's not so obvious that the achievement of price stability, on its own, is quite so economically-rewarding after all.

With the next general election looming, we may find ourselves with another policy wheeze potentially as revolutionary, at least to UK eyes, as the decision to grant the Bank of England its independence.

The Conservatives are promising to create an Office for Budget Responsibility. It won't have quite the same policy-setting powers enjoyed by the Bank of England but, staffed by a team of noted fiscal experts, it would be duty-bound to pass judgement on a government's fiscal plans, scrutinising the assumptions and projections which make up any fiscal decision.

This seems a sensible idea. Alongside the excessive borrowing of households and the excessive lending of banks, the other lesson from the crisis is that the Government, too, borrowed excessively. I'm not complaining about the necessary Keynesian fiscal stimulus, which was delivered as the crisis unfolded. The inappropriate fiscal deterioration happened earlier. The Treasury constantly redefined the economic cycle, making the so-called fiscal rules as tough as jelly. The Chancellor chose not to intervene too heavily in the City because big bonuses brought in big tax revenues. After all, without those bumper City tax revenues and increased amounts of government borrowing, Labour's cherished public spending projects would never have got off the ground.

Had an independent fiscal body been able to scrutinise the Government's arithmetic, perhaps we'd now find ourselves in a more favourable fiscal position, with less need to start slashing public spending. Nothing, however, is guaranteed. The Institute for Fiscal Studies' 2007 Green Budget noted that "by announcing £6bn of new tax increases and pencilling in an £8bn cut in public spending since the 2005 election, the Chancellor has followed our advice from earlier Green Budgets...we see no need for further tax increases at present, as long as he is able to stick to his PBR spending projections....If history is any guide, at some point the Treasury's fortunes as a fiscal forecaster will take a turn for the better." All fine and dandy but, given subsequent events, mostly inaccurate, even though the IFS is full to the rafters with fiscal experts.

Fiscal sustainability depends on an extraordinarily uncertain future path for the economy. If that path suddenly veers off in an unexpected direction, the fiscal outlook can alter dramatically. During the good times, when revenues are plump and social security benefits are low, governments look heroically prudent, even when they're not delivering budget surpluses year-after-year. During the bad times, governments simply look fiscally incompetent (and incontinent).

Even with an Office for Budget Responsibility, then, the chances of getting fiscal policy right may not be particularly great. Fiscal plans depend on projections about the future path of the economy and those projections, in turn, depend on knowing where the economy is within the economic cycle. All forecasters struggle to provide answers. The Bank of England may be independent of political influence, for example, but its central projections of economic growth, and the extremes on either side, proved particularly wayward in the first half of 2007. Back then, the worst that was likely to happen to the UK economy was a slowdown in growth to a little under 1 per cent in 2009. It now looks as though the economy will shrink between 4 and 5 per cent. You don't see forecasting errors much bigger than that.

So should a Office for Budget Responsibility just have economic "experts" on board or should is also have a role for the armchair economists who so far have predicted the crash far better.

One way to let the armchair economists have their say is to simply have a forum which the "experts" are required to read. Yes the "experts" would be free to disagree but would they really be so vocal at dismissing threats to the economy in such a public way. So far these people can easily dismiss forum's but if part of the role for the Office of Budget Responsibility was to listen to the people could govt policy be reigned in?

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Sure there is absolute moral hazard, ie you pay for your mistakes yourself...

ie

Bankruptcy is outlawed ,

IVAs are outlawed

Debtors prisons are reintroduced

Hence when younger people see the current generation of debtors in the acid mines , held over by truck act type arrangements forever , it will make them think twice about it.

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Sure there is absolute moral hazard, ie you pay for your mistakes yourself...

ie

Bankruptcy is outlawed ,

IVAs are outlawed

Debtors prisons are reintroduced

Hence when younger people see the current generation of debtors in the acid mines , held over by truck act type arrangements forever , it will make them think twice about it.

public sector aquaintance of mine (I know this is a regular subject for a rant, but it's a classic quote from a few days ago), employee of the Environment Agency

said 'I don't see why we should pay because the govt's in debt, can't future generations afford to pay the deficit instead?'

a whole chunk of society completely refuses to accept their joint responsibility for this mess and expects others to do so, with an almost religious self-righteous fervour. I agree Fred the Shred and similar bankers arew scum, but their deficit is dwarfed by the daddy of them all.

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public sector aquaintance of mine (I know this is a regular subject for a rant, but it's a classic quote from a few days ago), employee of the Environment Agency

said 'I don't see why we should pay because the govt's in debt, can't future generations afford to pay the deficit instead?'

a whole chunk of society completely refuses to accept their joint responsibility for this mess and expects others to do so, with an almost religious self-righteous fervour. I agree Fred the Shred and similar bankers arew scum, but their deficit is dwarfed by the daddy of them all.

Question is how do we assign who pays the debt if the government has made that debt on our behalf....in that not all people used the same amount of it.In that my dad is a UK citizen (barely) he got sick of the constant red tape and taxes , packed up and left a long time ago. He ratains his UK passport though probably wont renew it when it expires in 1 year.

Should he take responsibility for paying the debt when he has been out of the country and therefore not seen any 'benefit' from the debt?. I'm not sure what benefit I've see from the debt either living here.

Its probably why I prefer injin's if you want it pay for it yourself kind of view, I would not mind pay turnstyles on parks etc.

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Question is how do we assign who pays the debt if the government has made that debt on our behalf....in that not all people used the same amount of it.In that my dad is a UK citizen (barely) he got sick of the constant red tape and taxes , packed up and left a long time ago. He ratains his UK passport though probably wont renew it when it expires in 1 year.

Should he take responsibility for paying the debt when he has been out of the country and therefore not seen any 'benefit' from the debt?. I'm not sure what benefit I've see from the debt either living here.

Its probably why I prefer injin's if you want it pay for it yourself kind of view, I would not mind pay turnstyles on parks etc.

in practice, not talking about ideals, what should happen over next 5 yrs +, is that we all share a part, as we accept the democractic govt's right to govern on our behalf, so we bear the costs between us, dire as they are, even tho I didn't vote for them personally

If we live in the country and we are employed and we pay taxes then we all share some of the responsibility and cost, whether we are private sector or public, and this is a substantial cost

Edited by Si1

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in practice, not talking about ideals, what should happen over next 5 yrs +, is that we all share a part, as we accept the democractic govt's right to govern on our behalf, so we bear the costs between us, dire as they are, even tho I didn't vote for them personally

If we live in the country and we are employed and we pay taxes then we all share some of the responsibility and cost, whether we are private sector or public, and this is a substantial cost

Democratic right? , you are kidding me right? , the UK is most certainly NOT a democracy , my law professor stated once it is an elected dictatorship..

Taken a step back it is ineffect a despotism society , the only reason we observe the 'democractic' right os the govern on our behalf is that they have all the guns and armies of thugs to make people toe the line...

Again you are coercing people who have not benefitted from the debt into paying your debt hence its ineffect avoiding responsibility again by sharing it out.

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in practice, not talking about ideals, what should happen over next 5 yrs +, is that we all share a part, as we accept the democractic govt's right to govern on our behalf, so we bear the costs between us, dire as they are, even tho I didn't vote for them personally

If we live in the country and we are employed and we pay taxes then we all share some of the responsibility and cost, whether we are private sector or public, and this is a substantial cost

Democratic govt? I think with that statement you are opening up a pandora's box.

I'm more of the believe that those who took reckless decisions should be held accountable. People like Brown should be put on trial for negligence, I would love to hear his excuses under oath as to why he ignored repeated warnings about the housing market from the IMF, OCED, BIS etc.... if he has valid reasons then fair enough, if however it was because politically it was more profitable for the Labour party in winning votes he should foot the bill as well as his ministers.

That's have some moral hazard for our leaders.

Why should I pay for some tw@ of a politicians ego?

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