The current rules of the Stability and Growth Pact will not encourage eurozone governments to deal with their debts, argues a new report from the liberal think tank, CentreForum.
The current system doesn’t work. The pact failed to constrain eurozone governments from running large deficits, even in the boom times. It was watered down by France and Germany, and then ignored by other governments: Greece, for example, has run a budget deficit above the pact’s ceiling of 3 per cent of GDP for five of the last six years, without sanction.
It is vital that governments start to pay down their debt once the economy improves, and that their finances remain closer to balance over the next economic cycle. But as the crisis moderates, governments may again be tempted to borrow as yields investors demand fall.
In the paper, entitled 'Strengthening the Stability and Growth Pact with a common eurozone bond', CentreForum argues that governments need an incentive to balance their budgets. Eurozone governments should agree to set up a common bond system, through which a government may issue debt once it has raised taxes and/or cut spending, and its debt-to-GDP ratio is declining. A common bond would offer the most indebted governments access to a cheaper and more liquid debt market. But insisting that they make budgetary reforms before they can issue debt through the instrument should prevent them from overloading it, driving up the interest rate.
Commenting, the report’s author John Springford said:
“The German government fears that government bailouts would encourage bad behaviour. However, our proposed bond would discourage fiscal irresponsibility, as it would only be available to governments that were taking active steps to pay down debt.”
“Consumption and property taxes should rise to restore fiscal balance.”
Britain's finances are in a mess, and its political leaders locked in a bitter dispute about public spending cuts. But CentreForum argues that even eight years of spending restraint from 2010/11 will not get the UK out of the fiscal hole it is now in. The report argues that since it is actually a collapse in revenues that is primarily responsible for the soaring deficit, taxes will have to rise, alongside the necessary spending cuts. But this must be done fairly, and in such a way as not to endanger the economic recovery.
The paper looks at the current debt crisis in an historical context. By contrasting it with previous fiscal crises, it shows why a return to 'fiscal activism' was needed to stave off a depression. It also points out that while Gordon Brown's debt is far higher than anything Margaret Thatcher had to deal with, today's much lower interest rates make the cost of servicing that debt manageable.
The Labour government has strived to reduce poverty and inequality over the last decade – with mixed results. Overall poverty levels have fallen but the numbers in 'deep' poverty have increased. And while income and wealth inequalities have grown more slowly in the last ten years than in the previous decade, Britain is still a more unequal place today than when Labour took power.
But what does this mean for policy in the coming years? As Liberal Democrat MP David Laws asks: "If a Labour government cannot convincingly address the challenges of inequality of opportunity and income, what hope can there be for other political parties?" Laws answers this question and others in the first of three essays on equality. Conservative MP Greg Clark offers a centre right perspective, while Labour MP Jon Cruddas and Jonathan Rutherford provide a socialist critique of what they describe as the 'liberal consensus' on the issue.
By rejecting a co-ordinated fiscal stimulus before the G20 meeting starts, European leaders are risking the chances of an early recovery from the world economic slump – and with it their own agenda of long term financial market reform. In ‘Divided we fall: can the G20 save globalisation?’, liberal think tank CentreForum calls on leaders to focus on the urgent task of ending the global recession, while resisting the temptation to return to a politically popular but economically perilous protectionism.
The paper sets out four challenges for the G20 leaders. The first two – stimulating consumer demand and recapitalising the banks – are about jolting the global economy out of a dangerous deflationary spiral. The second two – restructuring international finance and reforming the international financial institutions – are longer term reforms that must be undertaken to stop this type of crisis from happening again. But success in each of these tasks, according to CentreForum, depends on whether the G20 leaders are prepared to forsake political populism and economic nationalism to agree upon a robust and co-ordinated rescue plan.
Neither the government’s fiscal rules nor the Conservatives’ committee of budget experts will help Britain out of its debt crisis, says a new report from liberal think tank CentreForum.
Its authors argue that parliament needs to reassert its control over fiscal policy. In recent years, UK politicians have sought to offer technical solutions to what is fundamentally a political problem. First came Gordon Brown’s fiscal rules; then David Cameron’s Office for Budget Responsibility. But such innovations simply blur responsibility for bringing the UK back to solvency.
Labour spent much of the last ten years claiming the fiscal rules would prevent a return to ‘boom and bust’. But the authors argue that they did no such thing. Rather, they succeeded only in obscuring the political choices that Gordon Brown was making every step of the way. Despite his talk of ‘prudence’, he was actually engaging in an old-fashioned public spending splurge that led to today’s structural budget deficit. That he was able to do so without breaking his rules shows how little they restrained the government in practice.
Now the Conservatives have proposed an ‘Office for Budget Responsibility’ – a new institution designed to keep the government on the straight and narrow. But CentreForum argues this merely replaces one technical solution with another, and will confuse both markets and voters about where fiscal responsibility lies.