Robert Chote: Brown can manoeuvre to meet his rule, but he might have done better just to break it

But, once again this month, the Chancellor has been accused of moving his own goalposts to make it easier to achieve his target.

Does it really matter if this mysterious rule is met or missed? Has the Chancellor been moving the goalposts? And is this the best way to convince people that the nation's finances are in safe hands?

The golden rule says the Government can only borrow to pay for investment and that tax revenues should cover other spending. Fair enough - most families would happily take on debt to buy a house, but would worry if they borrowed routinely to meet the weekly food bill.

It might be sensible to borrow even for day-to-day spending during a rough financial patch, such as a spell out of work. Similarly, the golden rule does not have to be met every year, only on average over the ups and downs of the economic cycle. The Government can borrow for current spending in bad times, as long as it runs a surplus in the good.

In adopting the rule in 1997, Mr Brown was, in effect, promising not to saddle future taxpayers with a bill for public spending from which they would not benefit. In addition, he wanted to give the Government greater freedom to increase investment from the low level he inherited.

But the golden rule is a blunt instrument to achieve fairness between generations of taxpayers. For one thing, investment does not always benefit tomorrow's taxpayers, while current spending does not only benefit today's. For example, spending on teacher training may benefit future taxpayers more than building fancy venues for the Olympics.

In addition, there is no guarantee that the benefits from a capital project would coincide with the debt repayments that finance it, so the same generation that pays can reap the advantages. But neither is there any guarantee within a generation that people's tax bills reflect the value they derive from public spending. Indeed, one reason governments tax and spend in the first place is to redistribute resources from some people to others.

This is not to suggest the golden rule is malign, merely that it should be treated as a rule of thumb. We should not agonise if it is met or missed by a few billion either way - especially as the balance between spending and revenue is hard to predict with accuracy even as little as a year ahead.

But Mr Brown has staked his reputation on meeting the rule to the letter. Four years ago, that looked a pretty safe ambition. Treasury fore-casts implied tax revenues would exceed current spending by almost £120bn over an economic cycle running from 1999-2000 to 2005-06.

Subsequently, this room for manoeuvre has largely evaporated, in part because of deliberate decisions to increase spending in areas such as health, education and tax credits, but more importantly because the Treasury's tax revenue forecasts have repeatedly proved over-optimistic.

As the probability that the golden rule might be broken has risen, so people have become more suspicious of statistical and presentational changes that make it easier to meet.

In 2003, the Chancellor dropped a short-hand method of calculating the margin by which he expected to meet the golden rule, in favour of a more complicated one that gave greater weight to the budget surpluses in the early years of the economic cycle. The Treasury said this was always the method it intended to use, but eyebrows were raised nonetheless.

Last month, the Treasury used revisions to the national accounts to argue that the current cycle began two years earlier than it had previously said. Conveniently, this allows the Government to borrow an extra £12bn without breaking the rule, by including the big surplus in 1998-99.

If trends in spending and revenues so far this financial year continue for the remainder, this means the rule will now be met by around £4bn, rather than missed by around £8bn. (This assumes the cycle ends in the current financial year, but weak economic growth may prompt the Treasury to delay the day of judgement and include 2006-07 as well.)

Bearing in mind the Treasury's method of dating the cycle - by trying to identify points in time at which there is neither upward nor downward pressure on inflation - pushing the start date back does not look unreasonable. But any estimate of the "output gap" between the current level of economic activity and that supposedly consistent with stable inflation is a matter of judgement. So there is concern that the Treasury is able to mark its own exam paper.

In a rare public comment on fiscal policy, Mervyn King, Governor of the Bank of England, argued two weeks ago that it was not sensible to define an economic cycle by fixed dates and questioned the Treasury's approach to assessing productive capacity in the economy. He pointed out that a small revision to an estimate of national income six years ago did not tell us anything new about the health of the public finances today. Mr King did not accuse Mr Brown of cooking the books, but his comments will not have done anything to bolster confidence in the policy framework.

The Chancellor will have an opportunity to refine the fiscal rules in his pre-Budget report later this year. Mr Brown could take a number of useful steps. He could hand the task of assessing where the economy stands in the cycle to an independent body, such as the Office for National Statistics. He could frame the golden rule in a more forward-looking way, so that the amount he can borrow today does not depend on what the economy was doing six or more years ago. And he could take more explicit account of the uncertainties that surround all forecasts for the public finances.

Alas, even changing the rules for the better may be seen as a weakening of resolve if the Chancellor's credibility has already been dented. He may come to reflect on Mark Twain's advice: "It is a good idea to obey all the rules when you are young, just so you'll have the strength to break them when you are old."

Robert Chote is director of the Institute for Fiscal Studies.

Taxation without complication... that must add up

Since the 1980s, the Finance Acts that turn Budget tax proposals into law have grown enormously in size and complexity. Last year's contained 328 sections and 42 schedules in 634 pages. The standard manuals for tax practitioners now exceed 11,000 pages.

To some extent, growth in complexity reflects the fact that business and economic life is more complex, and that governments see the tax system as a tool for influencing behaviour. But even turning apparently commonsense economic concepts into legislation has never been a trivial task.

William Gladstone lamented that the nature of property in Britain made it impossible to deal with income tax in a simple way, even in 1853. The economist Dennis Robertson once observed that: "The jails and workhouses of the world are full of people who gave up as a bad job the admittedly difficult task of distinguishing capital from income."

In the Finance Bill debate last month, John Healey, the Financial Secretary to the Treasury, blamed the private sector: "Many of the complexities in the Bill ... are a direct result of the complexity of the schemes that the tax planning industry suggests to its clients as ways of avoiding the tax that their clients should be paying."

Leaving aside the fascinating distinction between the tax that ministers think people "should be paying" and that which the letter of the law requires them to pay, there is clearly the danger of a vicious cycle in which avoidance begats complexity, and complexity begats avoidance.

What could be done? A defeated amendment to this year's Finance Bill proposed an independent body analogous to the Law Commission to make proposals for modernisation and simplification for MPs to vote on. In a similar vein, a working party set up by the Institute for Fiscal Studies has proposed a joint select committee of both houses of parliament on taxation and a tax structure review project, bringing together HM Revenue & Customs and practitioners.

Opponents have claimed that a tax law commission would encroach on the authority of the House of Commons, but the work of the existing Law Commission suggests not.

Cynics might see a greater desire to protect the power of the Treasury rather than the rights of MPs.

An independent mechanism to promote tax simplification remains worth pursuing.

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