THE CONSEQUENCES OF MR KEYNES.pdf - Institute of Economic ...

growth and deficit finance. Indeed, it exacerbated that bias in a
number of ways—as could have been predicted in 1961, on the
basis of an elementary application of micro-economic analysis
to political behaviour. 1
The PESC system revolves around a forecast of total government
expenditure in real terms over the following five years,
given governmental policy commitments over that horizon.
The assumption is that this procedure allows a decision on the
appropriate size of government expenditure in relation to forecast
national output over the medium term in the light of
macro-management objectives, and the co-ordination of departmental
spending programmes in line with that broad decision.
The PESC system certainly allows of such a decision. What is
at fault is that it also contains hidden, latter-day versions ofthe
presuppositions of Harvey Road, the Bloomsbury View, and
the dentist model of the economic adviser. It assumes that
governmental economic advisers are reasonably omniscient
beings whose forecasts are not subject to political and bureaucratic
pressures, and that politicians and administrators are
long-sighted, public-interest maximising individuals who act as
trustees ofthe future. If these implicit assumptions ofthe PESC
system are replaced with contrary assumptions, it is likely to
exacerbate the inherent bias of a Keynesian fiscal constitution.
The PESC system requires two forecasts: ofthe prospective
movement of GDP, and of total government expenditure, both
in real terms over a five-year horizon. The latter is based on a
specification of existing governmental policy commitments
involving government expenditure, and their projected resource
costs during the forecasting horizon as estimated at the basedate.
The defects of such a method of 'controlling' government
expenditure are mainly six.
First, and most fundamentally, it puts the emphasis entirely
on the expenditure side of the budget. There is no implication
or assumption in PESC that extra spending requires extra
taxation; it is simply assumed that the planned growth of
expenditure will be financed 'somehow' (perhaps by extra
public borrowing). The PESC system, therefore, embodies a
1 The only major public figure to have comprehended the defects of PESC on
this basis in 1961 was apparently Mr Enoch Powell; see his private letter to the
then Chancellor, reprinted in D. Galloway, The Public Prodigals, Temple Smith,
1976, pp. 154-55.
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