Osborne's Fiscal Charter: Keynes argued both a surplus and deficit should have a clear purpose in a balanced economy

George Osborne has succeeded in getting his charter of fiscal responsibility through Parliament, though it has faced opposition. Photograph: The Chancellor with guests at Port of Tilbury on 1 April 2014 by HM Treasury (License) (Cropped)

On Wednesday night, George Osborne succeeded in passing his Fiscal Charter through the Commons - in theory committing governments to achieving a fiscal surplus in 'good times' (BBC, 2015). Labour, after some twists and turns and with some abstentions, opposed the charter alongside other opposition parties as simply being a parliamentary tactic rather than a commitment to the principles under discussion (BBC, 2015{2}).

The move to introduce the charter has faced criticism, in particular from Green MP Caroline Lucas. Lucas has argued that a surplus simply siphons money out of the economy, that is then patched over with private debt, and that borrowing to invest could stabilise an economy by increasing jobs and tax revenues (CarolineLucas.com, 2015; Sparrow, 2015).

As for the economic theory behind the move? Well, John Maynard Keynes may have had something to say about that.

Keynes clearly agreed with the idea that a national debt was a major obstacle to a healthy economy, with an impact so wide that creditor countries aught to think very carefully about the level of repayments they insist upon (Miller & Skidelsky, 2012). However, he also believed that creditors, as well as debtors, aught to settle their accounts (Inman, 2012).

While not wanting to weaken the commitment of debtors to honouring their debts, Keynes believed that pressure needed to be applied to creditor countries to not build up excessively 'positively' imbalanced trading accounts - even going so far as to suggest large interest payments be paid, into an international investment bank, on a trade surplus.

Keynes' ideas have implications for the broader economy beyond the fiscal, and the obscure world of international trade relations.

The OECD has stressed that income inequality damages an economy, strangling growth by vampirically draining wealth from circulation in the broader economy (OECD, 2014). The money extracted in the accumulation of wealth needs to be replaced. That can lead to the ever accelerating pursuit of economic growth and to an obsession with making an economy 'competitive'. It can also lead to escalating private debt.

When looking to build an economy, the key word to take from Keynes is balance. For Keynes, both a surplus and a deficit should have a clear purpose and an idle commitment to either would be a reckless course to take. Keynes would have agreed with the idea of budgetary and fiscal responsibility, but he would have included within that remit a government using deficit spending to rebuild or improve the economy - rather than the strictly austere contraction of government that the Chancellor is pursuing.

References

'MPs approve Osborne's spending rules after heated Commons debate'; on the BBC; 14 October 2015.

'Labour's John McDonnell 'embarrassing' spending U-turn - video'; on the BBC; 14 October 2015.

'Caroline to vote against fiscal responsibility charter'; from CarolineLucas.com; 14 October 2015.

Andrew Sparrow's 'Osborne accuses Labour of wanting to run a deficit forever as MPs pass fiscal charter with majority of 62 - Politics live'; in The Guardian; 14 October 2015.

Caroline Lucas' 'Fiscal Charter means taking money from public then not spending some of it - will lead to more private debt & make further crash more likely'; from Twitter; 14 October 2015.

Marcus Miller & Robert Skidelsky's 'How Keynes would solve the eurozone crisis'; in the Financial Times; 15 May 2012.

Phillip Inman's 'If surpluses cause as many problems as debts, maybe we need to tax creditors'; in The Guardian; 3 January 2012.

'Inequality hurts economic growth, finds OECD research'; from the OECD; 9 December 2014.