The Implementation of the Fiscal Policy - Case Study Example

Comparison of Budget Management Policies of the United Kingdom and France The United Kingdom had been observing two fiscal rules under its for Financial Stability” (Emmerson & others, 1). The first rule is known as the” golden rule” wherein it is emphasized that “the government will borrow only to invest and not to fund current spending” over an economic cycle (Emmerson & others, 2). The second rule is that the “ratio of net public sector debt to GDP will be set at a ‘stable and prudent’ level, defined by the Chancellor as no more than 40% of GDP” over an economic cycle. The two rules had been set as early as May 1997 (Emmerson & others, 2). In the 2008 articulation, the HM Treasury has confirmed that the UK government had been pursing two fiscal objectives. The first objective had been to ensure over the medium term that spending and taxes are distributed fairly across generations (3). At the same time, the second objective had been to support monetary policy over the shorter term so the “economic stabilisers” can take effect and “smoothen” the path of the economy. The measure of whether the objectives are carried out is seen over a business cycle to provide policy makers some flexibility on an annual basis (HM Treasury, 3). As applied by the government of the United Kingdom, an economic cycle can be a long period involving several years. The number of years is not determined in advanced or ex ante but only ex post or inferred based on the performance of the economy itself over several years. For example, the HM Treasury consider the years 1997-98 to 2006-07 as an economic cycle based on an assessment “with evidence supporting” (HM Treasury, 3-4). During the economic cycle, the HM Treasury believes that the fiscal objectives of the UK government were achieved (HM Treasury, 4). According to the HM Treasury, the average current surplus during the period was 0.1% of UK’s GDP. For the UK Treasury, this level met the “golden rule” that government must borrow only to invest and ensure “sound finance” and “fairness between generations” (HM Treasury, 4). Further, the HM Treasury argued that during the period 1997-98 to 2006-07, public sector debt net debt was decreased from 42.5% of GDP to “only” 36.0% and the said figures are supposed to have ensured that net debt are maintained at below 40% of GDP during the economic cycle. The implementation of the fiscal policy during the period allowed however the tightening of monetary policy as the economy hovered above the trend during the latter part of 1990s and the loosening of monetary policy when the economy was below the trend performance in 2001 (HM Treasury, 4). Other than meeting the two objectives described earlier, budget management of the UK government also adheres to transparency (HM Treasury, 4). One of the several ways through which its policy of budget transparency is implemented is through its regular end-of-the-year publication of the fiscal and long-term public finance reports (HM Treasury, 4). In 2008, however, the global economy entered a new economic cycle. Major economic disturbances or shocks struck very country in the world (HM Treasury, 4). Thus, the government has to respond appropriately to the “exceptional circumstances” and has to adjust (HM Treasury, 4). In particular, while the UK government’s fiscal policy objectives have basically remained unchanged, the immediate priority of the UK government is to “continue to support the economy” while ensuring “fiscal sustainability” over the medium term (HM Treasury, 4). Fiscal stability is currently the tactical priority and UK has adopted a temporary fiscal operations rule: “improve the cyclically-adjusted current budget each year” until fiscal balance is achieved and debt falls as a proportion of GDP (HM Treasury, 5). The fiscal target for the new economic cycle is to return to the “cyclically-adjusted” current balance with debt as proportion of the economy significantly reduced (HM Treasury, 5). This fiscal target for UK will be valid until fiscal year 2015-16 when global economic shocks are expected to have subsided (HM Treasury, 5). Consistent with the foregoing discussion, Emmerson & others’ construction of UK’s fiscal data are in Figure 1. Figure 1. Actual and forecasted budget surplus/deficit as % of UK’s national income Source: Emmerson and others (3), Table 2.1 Compared to the more structure fiscal management policy framework or perspective of the United Kingdom, the fiscal management policy framework of France appears less structured. Howarth described French fiscal policy as one that attempted to “reform the restrictive rules of the price stability function of economic governance” but the country ended up tolerating the official policy because the official policy was not strictly enforced anyway (24). At the same time, however, Howarth notes that a more regular feature of French government policy pronouncement has been “political control” in macroeconomic policy, including fiscal policy (24). In particular, the 2007 OECD Policy Brief noted that the French national government intervenes in local taxation by offsetting the taxes imposed by local governments (10). In addition, the 2007 OECD Policy Brief also noted that the French national government grants tax exemptions on taxes imposed by local governments (10). According to the OECD, because of the national government intervention on local government action, French tax revenues have shrunk and contributed to the loss of accountability of government officials to their citizens (10). The implementation of France fiscal management framework is indicated in Figure 2 below. Figure 2 indicates that even with a relatively or allegedly politicized fiscal management policy, France has continued to appear in better shape compared to some European countries like Greece, for instance. Figure 2. Public deficits as percentage of GDP of select European countries Source: Warin (3), Figure 1 Table 1 below shows that although France has a higher negative public balance in 2003, UK’s negative balance is also high compared to its peers in Europe. However, France has a significantly higher debt at 65.1% of national income compared to UK’s 41.5%. Table 1. Public balance across EU countries in 2003 as % of national income Source: Emmerson and others (11), Table 3.1 Meanwhile Table 2 indicates that the United Kingdom has a trend on fiscal management that is diametrically opposed to France. Table 2 shows that while the government debt ratio as a percentage of GDP has been decreasing in the United Kingdom, it is increasing in France. Table 2. Government debt ratios of UK and France as % of GDP Source: Hagen (33), Table 2 Inspite of the fiscal situation of France, however, the UK believes that the institutions of the European Union have succeeded in creating a culture of fiscal accountability in Europe (Burns, 33). Work Cited Burn, John. Financial Management in the European Union. London: The Stationery Office, 2006. Emmerson, Carl, Chris Frayne, and Sarah Love. The Government’s Fiscal Rules. Insitute for Fiscal Studies: Briefing Note No. 16, April 2001 (Updated November 2006). Hagen, Jurgen von. “Fiscal Rule and Fiscal Performance in the European Union and Japan.” Monetary and Economic Studies, March 2006. Howarth, David. “Making and Breaking the Rules: French Policy on EU ‘gouvernement economique’ and the Stability and Growth Pact.” Paper presented to the EUSA Tenth Biennial International Conference, Montreal, Canada, 17 to 19 May 2007. HM Treasury. The Government Fiscal Policy Framework. London: HM Treasury, November 2008. OECD. “Economic Survey of France, 2007.” OECD Observer: Policy Brief, June 2007. Warin, Thierry. “Fiscal Perspectives in Europe: Convergence and Debt’s Burden.” Working Paper Series 124. Harvard University: Center for European Studies, 2006. Read More