Samuel Brittan, FT 99-02-04, excerpts

Gordon Brown, the chancellor, now concentrates on two main measures of balance, the surplus on the current Budget and the public sector debt ratio.
The aim is to achieve a current surplus in a normal year, with fluctuations around it in the course of the business cycle.

The Green Budget projects a bare current balance in 1999-2000, followed by small deficits in the following two years, offset by equivalent surpluses later. The public sector debt ratio is expected to fall.

Hardened Budget-watchers will turn early to the section of the Green Budget on "what can go wrong". There are no prizes for guessing that it is the threat of a recession a good deal worse than the slowdown to ½ per cent growth assumed in the central forecast. There are obvious risks from further trouble in Latin America, Russia, Japan or south-east Asia.

The biggest danger of all is the time bomb ticking away in the US stock market.

But the point on which I wish to concentrate here is the primitive reaction to the risks of such a deterioration from many financial and other commentators.

The Green Budget helpfully presents an alternative projection based on a reasonably severe, but far from worst case, forecast in which output falls by 1 per cent in the fiscal year 1999-2000 and then very slowly recovers.
This alternative shows public sector net borrowing moving to well above the Maastricht three per cent early in the next century. Worse still is the projection of the net public sector debt. On the recession basis, so far from dipping below 40 per cent it rises rapidly to nearly 45 per cent the year after next and reaches 51 per cent by 2003.

Nevertheless the widespread belief that in the face of an economic deterioration, Mr Brown would have to increase taxes or cut his public spending plans is crude beyond belief.

There is never a complete consensus among macro-economists on anything. But there is a near consensus that the target balance for the Budget should be achieved in a normal year or over the whole of a business cycle.
In boom years, Budget surpluses should not be "given away" and in years of slump deficits should be accepted.
In other words the built-in stabilisers should be allowed to cushion the effects of the cycle.

Even many economists who are very suspicious of fiscal demand management would still support a balance over a complete cycle on the grounds that frequent changes in tax rates are unnecessarily disturbing.
It is better to fix rates from a long-term point of view, just as individual families would be justified in seeing through both good and bad years on the basis of some idea of their long run incomes.

It is therefore alarming how much these elementary points have been lost sight of in the obsession with short-term fiscal balance which has arisen as a combined by-product of the Maastricht criteria, and domination of economic comment by bond market analysts.

Although I have taken the UK position as my reference, the point applies elsewhere.
Next time anyone tells you at lunch that some countries in the euro group are weakening in their commitment to fiscal stability, just ask whether he is speaking on a cyclically adjusted basis. That should lead to a change of subject before coffee.

In the US the argument applies in reverse. Much of the animated discussion on how to use the Budget surplus is premature, as it is based on the dubious assumption that a large surplus is here to stay instead of being the product of an unsustainable boom.

Cyclically adjusted estimates of the Budget are often mistrusted because they are highly uncertain. But the question is whether they are better than nothing. Moreover the uncertainties about cyclically adjustments are no greater than those for the crude projections.

The average Green Budget error in forecasting public sector borrowing two years ahead has been £18.6bn. or 1.4 per cent of GDP. The correct inference is that governments should aim at a surplus in normal non-recession years large enough to offset error and wishful thinking.

The built-in stabilisers are sometimes criticised from the opposite direction. Enthusiasts for fiscal policy often say that the extent of a stimulus or check should not depend on the accident of marginal tax rates or the size of the public sector but on the overall economic outlook.
The argument for the built-in stabilisers is one for rules rather than discretion. They allow some automatic cushioning when the economy goes into recession without either the delays or the eventual overreaction which can be expected from ministerial discretion.
Moreover the use of these stabilisers goes with the grain of people's long-term income expectations and does not impose tax changes which rational citizens would expect to see reversed.

The planned popular version of the Budget would be money well spent if it traded a few paragraphs from Labour's usual mantra about public services and fairness for an adult exposition of thing things: how fiscal prudence can be consistent with budget deficits and how these may be indeed necessary if the stronger countries are to sustain the world economy.