It’s time for a new fiscal framework

The publication of the OBR’s fiscal risks report helps us understand some of the pressures on fiscal policy arising from the pandemic, climate change and changes in the costs of debt. But it should not be treated as an excuse not to understand that fiscal policy’s main responsibility is to manage risk rather than being subject to it.

Rules rather than discretion have been the dominant paradigm in macroeconomic policy since the failures of the 1970s. Such rules should be transparent and widely understood and thus allow people to behave in manner consistent with their attainment. They should also allow us over time to measure the effectiveness of policy. Most importantly perhaps their attainment matches the people’s idea of what sensible policy should be. These ideas have so permeated monetary policy making that it is hard to imagine the world of mystique that preceded it. Accordingly, there continues to be no great concern about the continued targeting of price stability.