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Balancing Act

Tuesday 13 July 2010 - by Bernadette Mill


“The low rates of interest over the last 15 years caused an economic boom that invariably lead to bust. The problem with the sustainable investment rule was that nobody knew when the cycle starts or ends. Economic crises occur due to a lack of oversight and it is for this reason that I support balanced budget rules.”

Dr Butler argues that these measures would prevent the government from spending one pound out of every three pounds earned by the population. He says that this should be calculated as a third of past GDP outcome.

Under these proposals, the future spending commitments of governments would be public knowledge. Future costs may include the consequences of an ageing population and therefore the costs of future state pension payments, for example. Dr Butler says these measures could prevent the short-termism that has occurred in previous governments’ budgetary plans.

The concept of borrowing only to invest requires that governments do not use funds to settle debts or finance unsustainable levels of consumption. This resonates with the utilitarian principle that borrowing should only be used to invest in programmes or infrastructure for the greater benefit of society.
There is a general consensus that higher taxes make a nation less attractive for investment, migration and general commerce.



Research by the IMF, the European Commission and the Organisation for Economic Co-operation and Development suggest that the best route to balancing budgets is through a reduction in public spending rather than raising taxes.

Dr Butler also argues for restraint on increasing taxes and proposes a public referenda or the creation of a fiscal policy committee, before any changes to the rates of taxation. This would be similar to the monetary policy committee at the Bank of England. The proposed fiscal policy committee would therefore set levels of taxation in line with economic growth and investment.

This could result in lower tax levels in countries that successfully balance their budgets. Louis XVI’s finance minister, Jean-Baptiste Colbert once said: “The art of taxation comprised of plucking the goose so as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

If balanced budget practices are more widely implemented around the world, there will be greater pressure for larger economies such as the UK and China to follow suit.


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