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

More documents

Recommendations

Info

prospects for employment' 1 —whereas Keynesian theory would indicate the opposite. And even before 'the (1976) December Measures', the Prime Minister announced his rejection of the Keynesian notion of functional finance to his party supporters in ringing terms: 'We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that that option no longer exists, and that, insofar as it ever did exist, it only worked by . . . injecting bigger doses of inflation into the economy, followed by higher levels of unemployment as the next step. . . . That is the history of the past 20 years.' 1 The outcomes of any set of policies depend, however, not on the professions of politicians or Treasury officials, but on the effects of the measures they adopt. The real question to be asked ofthe 1976 crisis measures is: will these measures work to remedy the basic flaws of Britain's present Keynesian fiscal constitution ? An evaluation of the prospects First, what of cash limits? This measure does not represent any return to Gladstonian principles of cash control: about 38 per cent of total government expenditure is not subject to cash limits. These uncontrolled elements have been the fastestgrowing types of government expenditure over the post-war period. All that cash limits will do is to contain one ofthe glaring defects of PESC—the 'funny money' principle that removed the incentive for departments to seek economies on the nominal magnitude of their costs. The other defects of PESC—the temptation towards 'paper growth', the manana effect, and so on—remain firmly embedded in the system of 'controlling' government expenditure. The efficacy of cash limits in providing incentives to economy in departmental spending will in any event depend on the rigidity with which they are enforced. As matters now stand, a Contingency Reserve has been budgeted for in PESC plans to accommodate proposals not foreseen at the time of the PESC Survey, or which 1 Information Division of the Treasury, 'The December Measures', Economic Progress Report, No. 82, January 1977, p. I. - TheRt. Hon. James Callaghan, Labour Party Conference Address, 28 September, 1976. [70]
'could not be costed accurately enough at that stage to be included in the expenditure programmes. In addition, Ministers responsible for existing programmes under their control may seek extra provision (from the Contingency Reserve) to meet increases in the estimated costs of their programmes'. 1 In other words, there are loopholes to cash limits. More fundamentally, cash limits, like PESC, fail to grapple with the fundamental flaw in the British fiscal constitution—the divorce between government spending and revenue permitted by Keynesian prescriptions and the timing of spending and taxation decisions. 2 Cash limits in no way contain the ensuing political biases. Second, the Financial Information System is a valuable adjunct to the control system, but, again, it does nothing to check or contain the political biases arising from a Keynesian fiscal constitution. Monitoring public expenditure is not the same thing as controlling it. Third, the 'presentational' redefinition of government expenditure has removed some ofthe anomalous features ofthe old definition, and makes the British figures more easily comparable with those of other Western countries. It may have some internal and international public relations value: British public expenditure now looks much lower to domestic taxpayers and outside observers. And paper cuts in government expenditure are much less painful than real ones, too. But changing definitions does not change real problems. Fourth, the IMF conditions provide no long-term constraints. As North Sea oil increasingly begins to flow, the current account ofthe British balance of payments will (ceteris paribus) begin to look healthier. The need for IMF loans will cease—and so will the IMF constraints on domestic monetary and fiscal actions. Britain will then be back to square one—with an unconstrained Keynesian monetary-fiscal constitution. In the absence of constitutional reform, we may predict that the same biases as were witnessed before the IMF loan will re-emerge. In summary, the crisis measures adopted in 1976 have done nothing to remedy the basic defects of Britain's present fiscal constitution. All that they have done, from a long-term point of 1 Information Division of the Treasury, Economic Progress Report, No. 80, November 1976, p. 1. 2 C. Sandford, 'Wishful Thinking on Public Spending?', Banker, May 1977, pp. 47-49. [71]
Page 1 and 2:
The Consequences of Mr Keynes J. M.
Page 3 and 4:
INSTITUTE OF ECONOMIC AFFAIRS The I
Page 5 and 6:
First published April igy8 Second I
Page 7 and 8:
B. The Pre-Keynesian British Fiscal
Page 9 and 10:
PREFACE The Hobart Papers are inten
Page 11 and 12:
Hobart Paper 78 is, in effect, an a
Page 13 and 14:
PART I Democracy and Keynesian Cons
Page 15 and 16:
economic stability was replaced in
Page 17 and 18:
hortations to politicians to promot
Page 19 and 20:
c KEYNESIAN PRESUPPOSITIONS, DEMOCR
Page 21 and 22: supporting various-sized budgets, a
Page 23 and 24: Budget surpluses clearly have weake
Page 25 and 26: D. THE DESTRUCTIVE, SELF-FULFILLING
Page 27 and 28: These readjustments will disturb a
Page 29 and 30: es» PART II Keynes's Legacy to Gre
Page 31 and 32: A. BRITAIN'S CHANGING FISCAL HISTOR
Page 33 and 34: The Keynesian budgetary record In t
Page 35 and 36: a surplus ever been encountered. In
Page 37 and 38: Britain is almost unique amongst co
Page 39 and 40: The cohesion and functioning of the
Page 41 and 42: institutional framework. Faced with
Page 43 and 44: National Debt escalated over ten-fo
Page 45 and 46: purse, a change of fiscal attitude
Page 47 and 48: 5 THE GOVERNMENT would no longer be
Page 49 and 50: like ninepins'. 1 He could not have
Page 51 and 52: would be the way to hell if they we
Page 53 and 54: Thus, Keynes foresaw economists in
Page 55 and 56: wages up in spite of heavy unemploy
Page 57 and 58: public debt in peacetime'. Lord Kal
Page 59 and 60: followers anticipated. Many Keynesi
Page 61 and 62: 'The role of the economist as the i
Page 63 and 64: taxes or duties, or for an increase
Page 65 and 66: growth and deficit finance. Indeed,
Page 67 and 68: TABLE III THE 'HUMP EFFECT': PESC P
Page 69 and 70: comprises spending on private goods
Page 71: ward excluded from total government
Page 75 and 76: there is no 'problem' of explanatio
Page 77 and 78: In the long run—when, pace Mr Key
Page 79 and 80: A. FATALISM VERSUS REFORM This Pape
Page 81 and 82: concern about the conduct of budget
Page 83 and 84: Orderly transition to full implemen
Page 85 and 86: First, there is simply no evidence
Page 87 and 88: QUESTIONS FOR DISCUSSION i. Compare
Page 89 and 90: Some IEA Papers on Aspects of the N
Page 91 and 92: Five Outstanding IEA Books The Theo
Page 93 and 94: The Economics of Charity A. A. ALCH
Page 95 and 96: [continued from back cover _ 5. The
Page 97: Summary of The Consequences of Mr K
show all

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

Create successful ePaper yourself

Delete template?

Save as template?