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Labor should recognize every fiscal rule is a political choice


Instead of trying another round of austerity, Rachel Reeves should be working on investing in our economy.

After months of speculation, Labor finally gave in to pressure, abandon Its flagship project is a £28bn green investment commitment and plans to insulate 19 million homes by 2030 under suspicion. £28 billion is We at NEF are sure There is a need to lower emissions and create an economy that improves lives through wind and solar power, public transport and home insulation. Actually, we discover Insulating 19 million homes will reduce household energy bills by hundreds of pounds a year by 2030.

But, like George Osborne before her, if Rachel Reeves becomes chancellor she will argue that the economic failures of the previous government made it too difficult to borrow money to invest in the UK's future.in order to be seen as (economically responsible”, insisting on its arbitrariness Borrowing and Debt ruleThe Labor government threatens years of stagnation or even decline in living conditions in the UK, failing to cope with the future challenges of the climate crisis and an aging population.

A major component of this Government and Labour's debt and borrowing rules, also known as (The fiscal rules target a reduction in the government debt-to-GDP ratio within five years. For more than a decade, our government has been committed to reducing public debt through spending cuts. But years of austerity have done little to reduce the UK's debt-to-GDP ratio (Figure 1).Insufficient government spending and investment reduces demand, slows growth, and can lead to long term damage to the people and the economy.This is Widely recognized The UK is currently suffering the consequences of 15 years of underinvestment, including stagnant productivity and crumbling Public Service. Labor could try to reduce the debt-to-gross domestic product ratio through economic growth rather than re-attempting austerity. Borrowing money to invest can achieve this, especially if we borrow money to invest in the low carbon economy of the future.Green investment is Very good Promote growth, income and employment.

Figure 1: More than a decade of austerity has failed to reduce UK debt-to-GDP ratio

Although both major parties focus on the debt-to-GDP ratio (Now About 86%, excluding Bank of England debt), which is not a meaningful measure of how much safe borrowing space the government has (known as (fiscal space”). For example, Japan’s debt-to-GDP ratio rise It has exceeded 250% in recent years, while interest rates have remained low and affordable.At the same time, Ukraine breach of contract In 1998, the debt level was only 41.8% of GDP.Fiscal space is determined by more factors complex set Macroeconomic dynamics rather than simple ratios between parts of a government's balance sheet and a country's GDP.

This is why the UK has Nine sets of fiscal rules Since 1997. Our fiscal rules are not immovable laws of nature—they are invented and determined by our politicians. Prime ministers simply change fiscal rules when they become difficult to meet – they are a political tennis ball rather than a tool for effective policy. Even Jim O’Neill, the former chairman of Goldman Sachs Asset Management and the commercial secretary to the Treasury under then chancellor George Osborne, said: Since urging this government (Abandon the petty and arbitrary fiscal rules that magically claim the deficit will be lower in five years. ” Although Rachel Reeves appointed O’Neill as a consultant, she did not seem to take the advice to heart.

So if fiscal rules are arbitrary limits that fail to ensure the health of our economy, how are we supposed to decide how much the government should borrow and spend?At NEF we have suggestion This government replaces fiscal rules with new fiscal rules (Fiscal Referees”, an independent advisory committee to the Office for Budget Responsibility (OBR). These referees will be appointed by Parliament and follow a set of macroeconomic fiscal principles that take into account the complexities of the fiscal space – e.g. resource constraints, private sector assets Balance sheet position and public sector net worth. While the final say on taxation and spending remains with the chancellor, they will estimate the target range for optimal government spending over the rolling forecast period and taking into account wider macroeconomic dynamics.

However, if the UK government is determined to fix an arbitrary debt-to-GDP target, there are steps they can take to consider the positive impact of smart investment. First, they should extend the period in which fiscal rules apply. The government was unable to implement a significant economic revival within five years.

Second, they should extend the time horizon of OBR forecasts so that the costs and benefits of tax and spending decisions occurring over five years can be considered. Currently, tax and spending decisions are assumed to have no impact on the economy five years from now, meaning we underestimate the benefits of investing in climate policy, education and skills.

Third, the government should ask the OBR to explore which types of investment have a stronger positive economic impact per pound spent (known as (“Multiplier effect”).The International Monetary Fund found evidence The multiplier effect of green investments is significantly higher than that of carbon-intensive investments.

Finally, the government should ask the OBR to consider evidence Over time, the multiplier effect of certain investments may increase as the original financing costs through taxes and borrowing fade away and the benefits of the policy are fully realized.International Monetary Fund Discover For infrastructure and green policies, the multiplier increases by 20 years.

Every (“Fiscal rules” are a political choice. It's time for our politicians to start making the right decisions.

Picture: iStock



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