I am not altogether clear at the moment what the Conservatives’ policy is at the broader fiscal level. In current circumstances they probably need a few months to sort things out but they must speak with some clarity soon. It is clear to me that just as the Bank of England need to lay out their medium term objectives regarding monetary policy and explain how they will achieve them, the Conservatives need a Medium Term Financial Strategy (to use a phrase from earlier Conservative governments) for fiscal policy. If they come into government they will inherit a mess every bit as substantial as the one inherited in 1979. They will also have fewer “easy pickings” such as privatisation revenues and reductions in marginal rates from 98% available to them.
The previous strategy was “sharing the proceeds of growth”. I am not sure if this has been ditched or not. If the economy were to grow by 2% then government spending would rise by 1%. It was an odd strategy as it makes no attempt to ascertain whether government spending is worthwhile or not. Why build a few more bridges over the River Humber just because we need to raise public spending by 1% above inflation? If items of government spending should be scrapped, then scrap them.
However, it is understandable, perhaps, that the Conservatives might have wanted such a strategy in order to keep a discipline on spending departments whilst reassuring the electorate. Politicians have to think about the real world of public choice. In that case, the rule must also be symmetrical and the government must “share the proceeds of shrinkage”. Thus, if the economy shrinks by 2% in 2010, then the Conservatives must cut government spending by 1% in real terms. This will still leave the share of government in GDP growing during a recession but, on average, there should be more good years than bad and gradually government spending will fall.
But what about the starting point? It is likely that the government share of GDP will be about 8% higher if and when the Conservatives take office than at the time the “sharing the proceeds of growth policy” was announced. They could be in their third term before we are back to square one! In fact, neither sharing the proceeds of growth nor sharing the proceeds of shrinkage will be enough - we will need some radical action.