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5 December 2012

The Chancellor should admit in his statement that his rules were misconceived from the start

Autumn Statement wishlist.

By Tony Dolphin

Unless he can find some dodge to circumvent them, George Osborne’s fiscal rules are likely to require him to tighten policy in the autumn statement through some combination of spending cuts (such as freezing welfare payments) and tax increases. At a time when the economic recovery is so weak and economists are speculating about the possibility of a ‘triple-dip’ recession this would be folly.

The Chancellor should admit in his statement that his rules were misconceived from the start. The first is, in theory, no constraint at all because it only requires him to forecast that the deficit will be eliminated in five years time, not to ever actually eliminate it. But in practice, he interprets the rule as forcing him to take action now in order to demonstrate he is still on track to achieve his five-year target. The second rule – that debt should be falling by 2015-16 – is a bigger problem; it can only be achieved by more tax increases or spending cuts.

George Osborne should adopt a new rule specifying that the scale of spending cuts will vary according to the strength of the economy. When growth is weak, spending cuts should be scaled back; when it is strong, they should be speeded up. This would increase the credibility of fiscal policy and allow the Chancellor to relax policy in the autumn statement. This should be done through what is clearly a one-off boost to spending, and the best way to do that is by providing additional resources for infrastructure spending in 2013-14.

Tony Dolphin is from the Institute of Public Policy Research

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