requirement for setting fiscal policy in the UK's long-term
interests, says a treasury paper published yesterday.
Chancellor Gordon Brown said:
encourages sound and responsible decision-making so that policy is
set in the UK's long-term interest. The golden rule and the
distinction between current and capital spending lie at the heart
of our new approach to fiscal policy.
'We are determined to meet the fiscal rules: we will meet the
golden rule over the economic cycle for the first time for more
than 25 years. That is why we are taking a prudent approach and
aiming both at current surplus and bearing down on debt.'
The paper, Fiscal policy: current and capital spending, argues
that outturns under the previous fiscal framework were not in the
national economic interest. In particular:
- current spending exceeded current receipts by more than 1# per
cent of GDP a year on average over the last economic cycle, not
meeting the golden rule and imposing a burden on future
- public investment has fallen to low levels by historical and
international standards, even allowing for factors such as the
effects of privatisation, and there are maintenance backlogs.
Previous approaches to fiscal policy lacked transparency and
attached insufficient importance to the distinction between
current and capital spending. However, the government has taken
steps in its first two Budgets to reform the framework:
- the golden rule - borrowing only to invest and not to fund
consumption - recognises the different economic nature of current
and capital spending, and the public sector is being encouraged to
make best use of its existing assets;
- the government has set out clearly its two fiscal rules and is
taking a prudent approach to managing the public finances -
adjusting for the economic cycle and adopting cautious
1. The treasury paper discusses the rationale for the government's two fiscal rules in the light of trends in current and capital spending and their interaction with the fiscal policy framework. It argues that previous approaches to fiscal policy lacked transparency and attached insufficient importance to the distinction between current and capital spending.
2. As a result, the paper says, decisions did not accurately
reflect how future generations would have to pay for current
public spending; and the arrangements were widely seen as biased
against capital spending, and tended to encourage cutbacks in
capital rather than current spending.
3. The paper suggests that a more sensible fiscal framework,
while ensuring transparency and accountability, should focus on
long-term planning and outputs rather than short-term bargaining
and inputs. There should be a clear distinction between current
and capital spending, in both the overall control regime and the
departmental spending plans. And policy should be based on
prudence and stability, allowing for inevitable uncertainties.