147/97
24 November 1997
GOVERNMENT LEARNS LESSONS FROM THE PAST
Learning the lessons from the past is the key to successfully running Britain's public finances, says a Treasury paper published today.
The paper, 'Fiscal policy: lessons from the last economic cycle', identifies two key lessons for fiscal policy based on the experience of the last economic cycle:
-
adopt a prudent approach; and
- an open and transparent fiscal policy.
Chancellor of the Exchequer Gordon Brown said:
"The Government is determined to prevent a return to the boom-bust cycles of the past, and that means learning the lessons from the last economic cycle.
"These important lessons have been taken on board in the design of the new fiscal framework, which will be set out in more detail in Tuesday's Pre-Budget report. They confirm that this is the time to remain vigilant; there will be no relaxation of our tough approach to public spending.
"Just as the new framework at the Bank of England was designed to deliver low inflation, so the proposed Code for Fiscal Stability aims to encourage economic stability and will help to prevent history repeating itself."
NOTES FOR EDITORS
1. The Treasury paper notes that the current economic situation bears some similarities to that of ten years ago. The economy is moving above trend and borrowing is forecast to fall to low levels. Shortly after this point, however, during the last economic cycle, the public finances deteriorated rapidly. The PSBR reached 7 per cent of GDP in 1993-94. The costs of that deterioration have been high.
2. In highlighting the need for a prudent approach, the paper notes that fiscal surpluses at the end of the 1980s, when the economy was the peak of the economic cycle, gave a misleading picture of the health of the public finances. Policy was, however, relaxed, causing the fiscal position to deteriorate in a way that was not predicted in illustrative projections. The paper recommends that policy makers should adjust for the economic cycle and build in a margin for uncertainty.
3. It also argues that policy makers should set stable rules and follow them consistently, and should explain clearly fiscal policy decisions. However, over the last economic cycle, the stated fiscal policy objectives changed on a number of occasions as the fiscal position evolved. And estimates of cyclically- adjusted indicators were not published, making it difficult for outside observers to assess policy decisions.
4. The paper briefly describes how the Government has taken on board these lessons in the design of the new fiscal framework:
- the deficit reduction plan introduced in July built in a margin for uncertainty;
- economic projections are based on a cautious assumption of trend output scrutinised and endorsed by the independent National Audit Office;
- the Government has set clear fiscal rules over the duration of the economic cycle; - cyclically-adjusted fiscal indicators were published for the first time in July; and
- the Government's commitment to transparency and stability, and to achieving its fiscal rules, will be key elements of the Government's proposed Code for Fiscal Stability.
5. The paper will be available from Treasury Press Office on the morning of Monday 24 November. Non-media copies will be available from the Public Enquiry Unit (0171 270 4860/4870/4880).