Of fiscal follies: The Chancellor’s overreaching plan to abolish budget deficits fails the first test of common sense

The practice of economics, no less than politics, is an imprecise art, yet successive generations of policymakers fall prey to the notion that there are eternal verities that can be turned into infallible rules that will in turn deliver prosperity. History and common sense suggest otherwise.

So it is with the Chancellor’s idea of a law to make governments run an overall surplus in the public finances over the economic cycle, with a duty to run a surplus during “normal” times. It immediately begs the question of what “normal” is, and how George Osborne will know where we are in an economic cycle when it can only be seen in retrospect, and thus too late to adjust policy.

To be fair, Mr Osborne’s instincts are sound; the temptation to align the economic cycle to the political cycle has usually proved irresistible, and disastrously so. True, Mr Osborne is also prone to devising policy wheezes purely to wrongfoot Labour, and this may be another. Still, it is not in itself a mad idea.

The problem with economic policy making is that it can never anticipate “unknown unknowns”, in Donald Rumsfeld’s famous formulation. Thus, for decades after 1945, it was thought high unemployment and runaway inflation could not occur together. The arrival in the 1970s of stagflation wrecked the old policy assumptions and prescriptions.

Today, deflation is far more of a danger in the UK. Though not yet of the classic sort that has been debilitating Japan for the past two decades, it is not unthinkable. In that circumstance it would make little sense to run a budget surplus when the economy badly needs a stimulus, and there is no danger of inflation. In other words the economy is more than just the public finances, and events elsewhere – such as private investment and the public’s propensity to save – have to be taken into account.

Nor does monetary policy need to take on the burden of stimulating or restraining an economy when public spending can be more effective. As we saw in the recent Great Recession, ultra-low official rates do not necessarily jolt an economy into life. With a rules-based system for setting interest rates (the inflation target) and a rules-based system for the “fiscal stance”, where are the rules for co-ordinating the two?

Moreover, if monetary policy and fiscal policy are set by rules and monitored by the independent Bank of England and Office for Budget Responsibility, where is the democratic control of economic policy? And if we want to borrow to invest in infrastructure, to help solve the fundamental problem of poor productivity, surely we can do that in “normal” times?

Mr Osborne is hardly the first chancellor to seek comfort in rules. Before him Gordon Brown had a “Golden Rule”; Norman Lamont and Ken Clarke had their own framework, after our ejection from the ERM; Nigel Lawson had a balanced-budget rule; and Geoffrey Howe the Medium Term Financial Strategy (which really did work). And before all these were various prices-and-incomes policies with automatic formulas, alongside the Bretton Woods system of fixed exchange rates, which in turn replaced the Gold Standard. Each tried to solve the economic problem of the day; each passed into history.

So, we may confidently predict, will Mr Osborne’s idea of a fixed framework. Perhaps he has forgotten that no Parliament can bind its successors; or perhaps he is succumbing to the recurring ailment that infects almost everyone who holds his job – hubris.