Nick Clegg’s fiscal target – splitting the difference (

Stephen Tall writes that “in terms of policies, there wasn’t much that was new” in Nick Clegg’s Bloomberg speech. Giles Wilkes and others have suggested that, on the contrary, Nick’s fiscal targets are a welcome change from the excessive deficit reduction the Coalition has pencilled in for the next parliament.

These commentators think that Nick’s deficit target (below) is a continuation of Labour and current Coalition policy – to balance the budget excluding capital spending. My understanding, however, is that what Nick said was entirely new and would mean far more cuts and tax increases.

Here are Nick’s proposed rules:
1) significantly reduce national debt as a percentage of GDP, year on year (when growth is positive)
2) run a cyclically adjusted balanced total budget, excluding capital spending that enhances economic growth or financial stability

It would be good to know what is meant by “significantly” in the first rule, but it seems likely that the stricter of the two is the budget rule. The caveat suggests that this is not the same as Gordon Brown’s ‘golden rule’. Nick is not suggesting excluding all capital spending (as at present), but only that which “enhances economic growth or financial stability”. His (unfair) criticism that Gordon Brown “used to slap the words ‘capital spending’ on anything and everything just so he could get away with borrowing to pay for it” further suggests that this rule differs from Labour’s.

So all three parties now have a balanced budget target, and each is different. The Conservatives want an absolute budget surplus with no exclusions (but with investment rising with GDP), and Labour propose a ‘current budget’ surplus – excluding all capital spending – and falling debt.

Nick Clegg has now created a new target that excludes some but not all forms of capital spending. Ironically, Labour’s chosen measure is what the Coalition has been targeting, while the yellow and blue parties each wish to adopt a new deficit measure.

So what does it mean to exclude “capital spending that enhances economic growth or financial stability”? The Guardian reports that “according to the Lib Dems, Clegg’s proposals would allow borrowing to fund items such as transport, housing, and communications, which promote growth, but not schools and hospitals, which would have to be funded from ordinary tax revenues.”

Clegg’s speech refers to roads, railways, energy, housing, water and waste networks. It’s not easy to transfer these terms into figures and the answer is very sensitive to what’s included, but my estimate is that around 60% of net departmental capital spending would therefore be excluded from the balanced budget requirement.*

Labour’s proposed current budget surplus would exclude capital spending, which amounts to almost £30 billion a year. The Conservatives’ absolute surplus would mean spending cuts (or tax increases) by 2020 of around £30 billion more than Labour – but lower borrowing.

Clegg, despite arguing that this is not a “split-the-difference-party”, is proposing that roughly half of this figure should be excluded, but not the other half. Using my 60% figure, he is seeking fiscal consolidation perhaps £18 billion lower than the Conservatives suggest by 2020, but £12 billion higher than Labour. This is also £12 billion stricter than previous Lib Dem policy (supporting the Coalition’s fiscal mandate) might have suggested.

Given that Nick’s fiscal targets have, I think, been so misunderstood, clarification is needed. Which particular sectors would he exclude? Does BIS capital spending “enhance economic growth”? What of flood defences? And why not new colleges, school facilities, or boosting public sector energy efficiency?

And what is the theory behind such a target? What is wrong with excluding all net capital spending – an objective rule that means large, one-off costs can be spread across the many cohorts that will benefit. Or if we want to move to up-front funding (which in good times is also reasonable), why should we exclude any capital spending at all?

And if the aim is to separate out pro-growth spending that benefits future generations, why should we consider only physical infrastructure? Why not scientific research, teaching and early years support, for example, which will hugely shape the future economy (and indeed are more natural state activities than supplying houses or energy).

Giles Wilkes says that first and foremost “we should consider simply whether the sums of money available for public services will be enough.” Targeting an extra £12 billion of cuts or tax increases (as well as those needed to fund large tax cuts) means Clegg’s rule perhaps fails Giles’s credibility test after all. Given also its lack of a coherent principle, my concern is that Clegg’s target (if not a post hoc justification for the Government’s planned current budget surplus) may have been chosen only as a confusing attempt to ‘split the difference’ between Labour and the Conservatives.

* I used gross capital DEL figures for 2015-16 and included only transport, DCLG communities, DECC, Defra, and GIB (one could also use these classifications). To get net investment I accounted for depreciation (which makes a big difference) using figures available here.

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