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“Sound Finances”: Strategy or Soundbite

Published online by Cambridge University Press:  01 January 2020

Michael McMahon
Michael McMahon*
Affiliation:
University of Warwick, CEPR, CAGE (Warwick), CfM (LSE), and CAMA (ANU)
*
E-mail: mcmahonecon@gmail.com
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Abstract

A defining feature of (at least) the last three general elections has been the emphasis placed on each political party's fiscal credibility and their ability to deliver “sound public finances”. Applying the logic of household book-keeping, balancing the fiscal budget is said to capture such soundness. There is, however, little evidence that a balanced budget is necessarily sound. Instead, the evolution of public finances depends on (1) both the fiscal choices made on the level of spending and taxation, (2) the underlying growth of the economy which depends on far more than the fiscal decisions, and (3) interest rates on government debt and the financing needs of the government. As the economic situation changes, so too does the likely path of debt to GDP and hence the possible fiscal options open to a country. Sticking to the soundbite of “sound finances” has often distracted from the underlying menu of political choices and as such is a disruptive narrative in UK economics today.

Keywords

fiscal policydebt dynamicsdeficit reductionE62Z18
Type
Research Articles
Information
National Institute Economic Review , Volume 241 , August 2017 , pp. R13 - R32
Copyright
Copyright © 2017 National Institute of Economic and Social Research

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Footnotes

I would like to thank Jagjit Chadha, James Cloyne, Martin Ellison, Paul Labonne, David Lee, Andrew Scott and Boromeus Wanengkirtyo for extremely useful suggestions, comments and help. I am particularly grateful to Martin Ellison and Andrew Scott for making available their data. Any errors remain mine alone.

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