Commentary: Fiscal Policy and the Fiscal Position

As economics has developed, a number of different fiscal principles have been suggested. Perhaps the oldest principle was that the Government should balance its books. This principle was adopted by the 1979 Conservative Government but they delivered a budget in balance or in surplus only in 1988/89 and 1989/90. The same principle has been adopted in the Stability and Growth Pact, albeit with an element of ‘flexibility’ which requires countries to keep their budget deficits to less than 3 per cent of GDP except during periods of sharply falling output like the present. This approach was criticised in the 1990s in the United Kingdom on the grounds that, when revenues were weak, it was easier to cut investment expenditure than to reduce current consumption. Thus the principle of a balanced budget seemed to lead to a situation where the public capital stock was deteriorating. By comparison with other countries, the United Kingdom was, in any case, short of infrastructure capital. As a result it was easy to make the case for some alternative principle that would seem less inimical to public investment.