Could we have a constitutional lock to protect our economy?

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”

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4 Responses to Could we have a constitutional lock to protect our economy?

  1. Interesting idea, however it is one-sided. There are circumstances under which an increase in national debt is difficult to avoid, and even necessary, such as in the depths of a recession when the tax take shrinks. Ireland’s great dilemma now is the necessity to balance the books via a deflationary policy at the worst time in the economic cycle. I would at least allow for the relaxation of these rules in lean years – there’s no point saving up a nest egg in the good times if you never spend it, as Japan has found to its cost.

    On a broader note however, Parliament cannot bind its successors. There is nothing to stop a future PM from changing the rules as they are an impediment to populist public spending, the same way as Gordon Brown didn’t flinch from massaging his now-forgotten “golden rule” when it looked like the boom was going to go on forever. Your invocation of the Maastricht criteria (which only apply to Eurozone countries) also overlooks the fact that Germany and France have been getting away with fiscal murder for years because it is unenforceable.

    That said, your motives are sound. I believe the only way to entrench fiscal responsibility is to change the structure of government, the same way that monetary responsibility has been improved by the adoption of independent central banks (one of Gordon Brown’s notable triumphs, and one he gets little credit for these days). Not only would it be difficult for a future PM to undo central bank independence, it would also be crossing a qualitative line in the sand; whereas the progressive relaxation of quantitative limits, and defiance of Brussels, are politically much easier to justify.

    • Seymour Major says:

      Andrew,

      You are right that my suggestion did not cover for the need to borrow during a recession. I would hope Mr. Osborne could think of a different set of criteria to cover that one.

      You can look at Brown’s initiative to hand over the Bank’s setting of interest rates as a success. This was not Brown’s idea. It was a proposal being debated by conservatives when they were in office. Nigel Lawson favoured it and the Conservatives were very close to implementing it themselves. Gordon Brown’s initiative did give Labour a credibility boost.

      My own view is that Brown’s initiative resulted in less thought being made by Labour Governments about how markets work. Under Brown’s terms, the Bank was given inflation targets for the purpose of setting interest rates. That turned out to be too crude. The only criteria for measuring inflation was consumer inflation. High street prices remained low while land inflation ran away. George Osborne, to his credit has already recognised the need for a link between interest rates and asset inflation as well. Brown will also be remembered for his stripping of the Bank of England’s regulatory powers. A crucial safety valve which might have prevented a banking crisis. Again, little thought was put into this. He did this after being lobbied by the city.

      I admit that it would not be easy to devise a binding way to make a future government less likely to be financially irresponsible. However, even if it is non-binding, it can still be highly influential. The Government ought to be thinking along those lines – in the National Interest (soon to become common buzzwords).

  2. John Green says:

    Is it fair to say that the period of the Labour Government has brought the Country to its knees ? and are they responsible enough ever to get back into Office ? We hear about the Banking Crisis, but in reality what figure did that contribute to our total level of borrowing, as all we hear from labour is that everyhting was fine until that happended ? looking at the stats quoted this is far from the case. Why doe no one bring them to task or quote the figures ?

  3. Seymour Major says:

    John,

    Firstly, the figures on Labour’s record pre 2008 are worse than I described because in that period, they increased considerably the burden of taxation as a percentage of GDP.

    I remember when the Banking crisis broke out, the Conservatives coined the phrase “failed to fix the roof when the sun was shining.” How much more powerful that would have sounded if they had said it during the boom years.

    One of the problems faced by the Conservatives was that John Major’ s government appeared to have broken with traditional Conservative prudence by increasing the National debt. That was not all his fault because there was a recession in the early part of his administration. Also, in fairness to Major, his spending plans would have meant that the National debt would have come down during the 3 years that followed the 1997 election. Labour stuck to the Conservative spending plans in the first years of their term and the National debt duly came down until 2001.

    All of this meant that Labour was in a position to obfuscate on public finances to the point where nobody could have followed that what they were doing was wrong. Worse still, everybody believed Gordon Brown when he said “no more boom and bust”

    I think that one of the most puzzling thing about those years was the lack of analysis by leading journalist economists. There you go.

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