Commentary: Proposals for a new fiscal framework

Modern representative democracy is faced with the Whiggish directive to improve living standards with the main lever in possession of any government being its fiscal policy. That is its choice on how much to spend, tax and borrow and on what. The electorate is supposed to assess the alternate options offered by the political marketplace, and the set of offered policies that most closely match those of the electorate, or more precisely its median voter, will be the basis for the government’s fiscal strategy (Persson and Tabellini, 1994). And yet once in office governments are not in control of events and must respond again and again to developments that cannot have been imagined only a few years earlier (e.g. Brittan, 1969). Our recent history alone has produced three extraordinary events in a dozen or so years that have in turn asked for flexibility, and then constrained the operation of fiscal policy: the Global Financial Crisis (GFC), the Brexit vote and the Covid-19 pandemic. As much as a politician wants to be seen as the saviour of the nation, they also do not wish to be seen as the person who suddenly bankrupted the state.