Should we have a "debt-brake" clause?

View

In Summer 2007, a chasm opened up in our public finances between what we collect in taxes and what we spend on day-to-day government spending.

The initial government reaction - not necessarily a bad one on a short term basis - was to borrow while we adjusted our finances, a decision presumably made in the belief this was a short term problem.

15 months later, the global financial crisis hit and any illusion about this being a short-term problem that we were facing should have disappeared.

Instead though, we have kept borrowing to cover the shortfall in day-to-day government spending and the arrival of the IMF seems to have scarcely impacted our determination to continue doing so for the next few years.

Both in the US and increasingly in the EU, states (in the US) and member states (in the EU) have either adopted or are in the process of adopting "debt-brake" clauses in their respective constitutions to prevent just such a situation where politicians can clock up debt. This, of course, increases the pressure on them to manage the budget properly in the first place and to correct it quickly should problems arise.

What I find most astonishing about our reaction to the financial crisis that we face, is that this idea seems to be completely absent from our domestic political debate. I could understand that we might want to phase it in given the scale of our financial problems, but the fact that we aren't even considering this is, to my mind, astonishing.

Does anyone else believe that we should have such a clause in BnahE? And, if not, why not?

murphaph

View wrote: »

Does anyone else believe that we should have such a clause in BnahE? And, if not, why not?

I firmly believe there should be a debt brake in our constitution. We have no moral right to pile debt onto following generations because we are too stubborn/proud/stupid to take our generation's medicine now.

A debt brake should allow the government a measure of flexibility to borrow for current spending (not much) but allow more flexibility to borrow for capital projects that will actually benefit future generations.

Zubeneschamali

View wrote: »

And, if not, why not?

What the FF crew did wrong was pro-cyclical Government policies: when they had cash, they spent it. When there was a bubble, they inflated it further. We all agree it was wrong, now.

To do the opposite, counter cyclical policies, requires 2 things:

1) Save in the good times, cool off the overheated segments, raise money

2) Spend during the bad times to stimulate the economy and prevent mass unemployment.

Putting a constitutional brake on debt would impede a properly run government from doing step 2. Deficits should be considered over the long term, the full business cycle, without hobbling the Governments ability to borrow to soften a downturn.

murphaph

Zubeneschamali wrote: »

What the FF crew did wrong was pro-cyclical Government policies: when they had cash, they spent it. When there was a bubble, they inflated it further. We all agree it was wrong, now.

To do the opposite, counter cyclical policies, requires 2 things:

1) Save in the good times, cool off the overheated segments, raise money

2) Spend during the bad times to stimulate the economy and prevent mass unemployment.

Putting a constitutional brake on debt would impede a properly run government from doing step 2. Deficits should be considered over the long term, the full business cycle, without hobbling the Governments ability to borrow to soften a downturn.

but if you've saved during the good times then the money should be there without the need for borrowing during the bad times.

I think we all know that not many governments around the world can be trusted to behave prudently like this as people (often stupidly) vote for tax cuts and spending increases, not prudence (in general). Given this failing in so many politicians and so many voters, a debt brake may be the only way to prevent them ruining us in the bad times.

Sad, but true I feel.

Scofflaw

I'd be in favour (although I can see what Zubeneschamali is saying) with a reasonable mechanism for breaching the ceiling, such as a super-majority in the Oireachtas.

cordially,
Scofflaw

aftermn

Surely it would depend on how the amendment was worded, and how it would impact.
If we had an immediate effect, i.e. weren't allowed to borrow when country runs into deficit, how would we cope with what has happened this time.
An immediate cessation of spending (back to the level of income) would have collapsed the economy completely.
Of course it may also have forced the FF'er's to think before they bailed out the banks.

Godge

Won't the EU just impose this on us?

If the Eurobond idea is to get any traction, I can only see it working based on a country being able to use Eurobonds to fund a deficit up to say 3%. Afther that they are on their own. For a country like ours, that would be as good as a constitutional debt-brake.

Scofflaw

Godge wrote: »

Won't the EU just impose this on us?

If the Eurobond idea is to get any traction, I can only see it working based on a country being able to use Eurobonds to fund a deficit up to say 3%. Afther that they are on their own. For a country like ours, that would be as good as a constitutional debt-brake.

While the troika could in theory decide to tighten our spending limits, that seems highly unlikely, given that we're being held up as the poster-boy for handling our debt problems. It would send a message that no matter how well you do, they'll ask for more, which isn't a message they'd want to send.

As for a constitutional debt brake, they can't force us to make any constitutional changes. It might be asked as the price for tapping eurobonds, but it would still be a voluntary choice requiring a referendum.

cordially,
Scofflaw