Fiscal policy: Balancing budgets

by / Thursday, 15 October 2015 / Published in Economy

BRITAIN'S parliament passed the "charter for budget responsibility" in a move that was seen as a tactical triumph for George Osborne, the finance minister, largely because it led to a u-turn in opposition Labour policy. The charter is designed to achieve a budget surplus in "normal times", with an immediate aim of the 2019-2020 fiscal year.The use of the "normal times" phrase is designed to get round the usual objection to balanced budget amendments; that they prevent governments from using fiscal stimulus to revive the economy in a recession. The charter says thatThese targets apply unless and until the Office for Budget Responsibility (OBR) assess, as part of their economic and fiscal forecast, that there is a significant negative shock to the UK. A significant negative shock is defined as real GDP growth of less than 1% on a rolling 4-quarter-on-4-quarter basis. If the OBR assess that a significant negative shock: occurred in the most recent 4 quarter period; is occurring at the time the assessment is being made; or will occur during the forecast period then: if the normal times surplus rule in 3.2 is in force, the target for a surplus each year is suspended (regardless of future data revisions). Still, Ha-Joon Chang argued in the Guardian that the rules are still unnecessarily restrictive. If interest rates are low, then a government (just like a business) has …
Source: The Economy