What does it mean to be fiscally responsible?

Expect to hear this phrase a lot next week from the Labour Party – “fiscally responsible” or “fiscal responsibility”. The last time I heard it used was on Sunday when Chuka Umunna was being interviewed on The Sunday Politics by Andrew Neil. Umunna is the Shadow Business Secretary and he was squirming under questioning about why Labour wouldn’t pledge to renationalise Royal Mail. Umunna said he wouldn’t because he didn’t know how much it would cost to renationalise and he wasn’t willing to write a ‘blank cheque’. Labour, he said were determined to be a fiscally responsible government. But what does this mean?

The phrase has two meanings. One used by politicians and neo-liberal economists, and one, more relevant (to 99% of us) meaning.

The first meaning is all about numbers and rules i.e. the deficit shouldn’t be bigger than x, or the debt-GDP ratio shouldn’t exceed y. These numbers will be completely arbitrary and purely designed to make the person advocating them sound sensible or competent. Indeed, in the EU there is a fiscal rule that deficits should not exceed 3% of GDP (how’s that going). How did they come up with that? Is 3% some sort of tipping point? No. One of the French officials who helped come up with the rule said:

“We came up with the 3% figure in less than an hour. It was a back of an envelope calculation, without any theoretical reflection. Mitterrand [the French President at the time] needed an easy rule that he could deploy in his discussions with ministers who kept coming into his office to demand money … We needed something simple.”

You will often hear politicians talking about the way the spend your money, of getting value for money, or not wanting to shoulder future generations with debt. Expect this to be a theme from Labour as they try to convince people they can be responsible with ‘taxpayer’s money’. It’s likely we will hear Ed Balls come out with some nice sounding ‘fiscal rules’ before the next election. They will be completely bogus. ‘Economically illiterate’ as people are fond of saying these days.

A lot of people do seem to approve of these messages though and agree that’s how a government should act (a lot of this is down to people believing governments are spending their taxes, but as I argued here, they are not). The problem is however, this is absolutely not how a responsible government should be acting, and doing so is likely to be detrimental to the majority of its citizens.

Which brings us onto the second definition of fiscal responsibility. Here’s Professor Bill Mitchell on what we should think of fiscal rules (like a deficit limit for example):

“Is a deficit that is 2 per cent of GDP better or worse than one that is 4 per cent of GDP? The answer it that it all depends. The higher deficit figure might be the exemplar of fiscally responsible policy choices whereas the lower outcome might indicate fiscally irresponsible decisions. Or, the opposite might be the case, depending on the circumstances. There is nothing intrinsically good or bad about any specific budget outcome.

…It is not the government’s role to run deficits or surpluses. We want governments to make policy choices that will maximise the potential of the people to enjoy their lives and contribute the best they can, given their own circumstances to the well-being of society and the planet.

We might call this goal one of public purpose. An essential element of that goal, given current cultural morays in most nations, will be to ensure that everyone who wants to work has a job and for those that are unable to work, for whatever reason, have adequate income support so they are not alienated and socially-excluded.”

So a more relevant definition of fiscal responsibility would be the responsibility of government to use its spending power to maximise real outcomes like full employment and increasing living standards, building homes for people and ensuring we have world class health and education systems. But responsibility also includes ensuring inflation doesn’t get out of control, so it doesn’t mean spend spend spend. Tax and spending decisions should be taken on the basis of maximising real outcomes while keeping inflation stable. That’s true fiscal responsibility.