Chancellor Gordon Brown would have narrowly missed his own golden rule on fiscal policy, had he not changed the economic cycle, according to the Treasury Select Committee.
Its report on this year’s Budget, published yesterday, claims had the Chancellor not revised the economic cycle from 1999 to 2006 to 1997 to 2009 he would have missed his golden rule incurring a cumulative deficit of £1.9bn.
The report cites the Institute of Fiscal Studies (IFS), which says minor revisions to the historical and projected budget surpluses over the cycle shown in the 2006 Budget compared with the 2005 Pre-Budget Report do not change this conclusion.
The report also cites evidence to the Committee on the 2005 Pre-Budget Report, in which Robert Chote, director of the IFS cautioned that "the golden rule at best was only ever a reasonable rule of thumb … The idea that over a period of seven or twelve years if you beat it by one billion that is terrific and you miss it by one billion that is a disaster just is not sustainable on any analytical grounds."
Moreover, the Treasury Select Committee cites further evidence in its previous examination of the 2005 Pre-Budget Report in which the International Monetary Fund (IMF) concluded in December 2005: "The fiscal rules are playing an important role in disciplining fiscal policy, although at times this role is overshadowed by peripheral controversies.”
The IMF did however also argue the current form of the golden rule required a precise dating of the cycle which was not only difficult but meant adjustments in the definition of the cycle had proved an unhelpful distraction from the more important considerations of what a sustainable fiscal policy is and how it should be achieved.
While noting the Treasury's most recent projections, which show that the government is on course to meet the golden rule after the end of this economic cycle the Treasury Select Committee says it remains concerned fiscal policy towards the end of a cycle may be constrained unnecessarily by spending levels or data classifications from as far back as 12 years earlier.
It also raise concerns revisions to data might require “sudden and undesirable changes to tax or spending in the final years of the cycle for the sole purpose of meeting the mechanical calculation implicit in the golden rule.”
“We remain of the view that it would be appropriate to review the fiscal rules now such that any improved formulation of the rule could be introduced at the start of the next cycle,” the report states.
Meanwhile, the report also calls for the estimated present value of the government's public sector pension liabilities, which it says is useful for the purposes of comparing the pensions provision for public sector employees with that for employees in the private sector, to be published regularly. This is something the Chancellor appeared unwilling to do when he faced the Treasury Select Committee recently, claiming the government already adhered to international accounting standards for public sector pensions liabilities. But the Treasury Select Committee says future public sector pensions can be paid from future tax revenues and therefore long-term forecasts of cash payments are directly relevant when considering fiscal sustainability.
The Government Actuary's Department estimated the total accrued liability of unfunded pension schemes for public sector employees at £530bn as of 31 March 2005. But this estimate is sensitive to the discount rate used. The measured pensions liability increases substantially if a lower discount rate is applied and likewise, the liability falls significantly if a higher discount rate is used add the report.
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