The golden rule was iron pyrites after all
Gordon Brown invented the golden rule so he cannot complain that he is being beaten with it. But a smart spin-doctor might still argue it has not been broken despite soaring debt.
The rule states the government’s budget should balance over the economic cycle and the accompanying sustainable investment rule limits government debt to 40 per cent of gross domestic product. After buying control of most of the high street banks, nevermind the Keynesian spending spree to give electric-shock treatment to an arrested economy, those rules have been breached categorically.
When the overspending was small, the government redefined the “economic cycle” to argue the golden rule still applied. Now that money is being handed out as if it has no value, it needs an even more creative excuse.
And surely that excuse is that there are cycles within cycles – short-term oscillations within long-term trends, just as temperatures fluctuate with the seasons but the seasons themselves are subject to climate change.
The Bank of England keeps telling us today’s problem are the worst since the First World War – meaning that while we have had downturns and crises in the succeeding decades, this is a recession even by recessionary standards.
So just as the golden rule allows overspending in individual years but requires a balance over the short-term cycle, what Brown needs is a platinum rule that states golden rules must be met over the longer cycle but can be breached in any particular boom and bust.
In other words, the current exceptional period allows exceptional terms but the golden rule will be returned to as soon as normal economic cycles resume.
Unfortunately, while chancellor Alistair Darling may attempt to justify a suspension of the golden rule in such terms, in practice he will not be in office when the next normal cycle comes round and the rule is thus dead – just like the other economic rules devised by politicians.
The truth is all these rules are postulated while the market allows them to work and abandoned as soon as an exception breaks the rule.
Until the 1970s the political mantra was fixed currencies: devalutations overcame short-term pressures but the rule continued to be applied at a new level but eventually the rule was abandoned entirely. Monetary policy then became the political loadstar until practice parted with theory. For the last decade inflation has been the talisman but those figures have now departed from target. Now the golden rule has proved impossible too – like a New Year’s resolution that is breached within the month and abandoned by Easter.
A bad target is better than no target, but if there is a magic economic formula that fits ever circumstance it has not been discovered yet. The golden rule was fools’ gold after all.
