There were plenty of attacks on the Labour Party during the Conservative Party conference. They were not just enjoyable to listen to. They were justified.
However, there was one part of David Cameron’s speech which did perplex me slightly. Of the Labour Party, he said:
“they must not be allowed anywhere near our economy ever, ever again”
A song from ‘H.M.S. Pinafore‘ (Gilbert and Sullivan) entered my mind. I imagined David Cameron as Captain Corcoran and the chorus challenging that part of his speech.
Chorus: “what never?”
Cameron: “No never”
Chorus: “what never?
Cameron: “Hardly ever
Yes, it would be nice to imagine that the Labour Party will never be in power again. Sadly, that would be taking political fantasy too far. I don’t think that David Cameron was suggesting that either. On the other hand, would it not be possible to devise a constitutional locking mechanism to prevent a Government from “ruining” the economy?
We may now be in a new era of constitutional locking. Last week, at the party conference, William Hague announced that a new Act would be passed with the object that no further powers would be ceded to Europe without a referendum.
That leads me to a question. Could Britain’s financial mess have been prevented if there was a constitutional locking mechanism in place which protected the economy?
In a sense, we already have some locking mechanisms within the EU rules brought about by the Maastricht Treaty. The EU rules require that the ratio of the annual government fiscal deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. They further require that the ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year.
According to the Office for National Statistics, the UK breached these rules in the year 2007/8 in relation to Budget deficit and in the year 2009/10 in relation to National debt. Quite obviously, part of the reason for our present deficit and rising national debt was the banking crisis. For the purpose of this post, I ask readers to ignore the dramatic rise caused by the Banking crisis.
I refer to the years that the Government was NOT in breach of the Maastricht rules. The really revealing aspect of Government borrowing before 2008 is this.
In the years before the Government breached the rules, it was borrowing almost as much as it could, without breaking them. You can imagine Gordon Brown 4 years ago talking about the strategy for winning the next general election. Looking at the right hand graph showing the national debt, it was obvious that before the year 2009/9 the Government would have thought it had plenty of borrowing “to play with.” The banking crisis drove a “coach and horses” through their plans. That was obviously not foreseen by them.
Government borrowing is very rarely a genuine investment which makes the economy more productive. The proper ethical, broad National interest, approach of the Government would have been to reduce the National debt with a view to building some surplus during the high growth years, rather than borrow more money. Over a longer period, it means that taxes are being used raised to pay for interest. The Labour Party, in their last Government, put selfish political calculation ahead of the National interest. For the sake of political balance, not every Conservative Government has an impressive record in relation to managing the National debt. Margaret Thatcher’s record is exemplary. From 1979 to 1990, under her Government, the National debt fell from 47% to 26% as a percentage of GDP. In the years 2001 to 2007, the Blair/Brown Labour Government added £195 billion to the National debt.
When we are overtaxed, we feel it. When interest rates shoot up, we feel it. When public services are poorly delivered or cut, we feel it. On these points, at least, the voters can see a visible link between these problems and the performance of the Government. However, when there is creeping over-borrowing, we don’t feel until after it builds up over a long time. A Government is unlikely to be punished electorally for that and yet when a Government. There lies the heart of the problem. We can not rely on electoral accountability when Government irresponsibility is so difficult for voters to see. So can new constitutional locking mechanisms help us?
Having rules can be a good thing. The evidence indicates that the last Labour Government did, at least, try to follow the Maastricht rules. This Government should give very serious consideration to bringing in new rules of its own.
The following is a suggestion for a constitutional locking mechanism on the budget deficit. In any fiscal year, the budget deficit must never exceed the greater of
(a) 3% of GDP (as per the EU rules); or
(b) 0.5% less than the rate of growth of GDP for the previous year.
Under this proposal, the National debt could theoretically increase BUT it is bound to continue going down as a percentage of GDP. Of course, there might be exceptional circumstances where the Government has to exceed the borrowing requirement (such as a very deep recession or a war) so the proviso would be that those figures could only be exceeded if two thirds of all MPs elected to the House of Commons vote in favour of it.
I commend this proposal with a quotation of Thomas Jefferson (US President 1801-1809).
“In questions of power let us hear no more of trust in men, but bind them down from mischief with the chains of the Constitution”