Britain's budget surpluses and economic policy gaps

The UK's macroeconomic policy is uncoordinated and still unduly influenced by political factors, as the new budget proposals show

The lack of coordination of the different parts of UK macroeconomic policy - fiscal, monetary and financial - has caused problems for some time now. Political, not economic, factors have continued to have undue influence. They are much in evidence currently in the chancellor's proposal to run budget surpluses in the future, in spite of his earlier quite elaborate extensions to both financial and prudential regulation. If these new arrangements work, there is no need to build up surpluses to offset the effects of a future crisis and this calls into question his motives for doing it.

There are important lessons to learn from the years before the financial crisis, when financial liberalisation in the UK and elsewhere led to huge increases in private sector debt based on highly speculative collateral requirements. This fuelled a rapid increase in the consumption-to-income ratio, the major engine of growth in the economy then. After two years of fiscal consolidation, Labour also slackened the fiscal stance in the early 2000s. If the Bank of England had been operating independently as planned, it would have tightened monetary policy, which would also have curbed the asset bubble and limited the excessive risktaking in the financial sector, as well as acting simultaneously to offset the fiscal relaxation. This, however, did not happen, either due to a complete failure of the Bank to understand these developments or because it was not actually operating independently.