Over on ConservativeHome yesterday, Sajid Javid MP argued that the Britain should cap its national debt. Next month, he’ll be introducing a National Debt Cap Bill in the House of Commons to this effect. Bravo, Sajid!
I’m a big fan of the idea. The simple truth is that you can’t trust government to be fiscally responsible. Political imperatives mean they will almost always prioritize the short-term over the future. In spending terms, what’s a little more debt if it lets you carry on with the bread and circuses? The result is that governments tend to adopt a buy-now, pay-later attitude. All the incentives point in that direction.
That’s why rules are important. You need to impose limits on governments; you can’t just rely on their discretion. And a debt cap is the perfect place to start. But I’d like to see much more besides. Indeed, I’d like to see the government introduce a fully-fledged Economic Responsibility Act, like the one Eamonn outlined in this briefing paper.
As Sajid suggests in his ConHome piece, we should cap the national debt at 40 percent of GDP. We’re a little over 60 percent at the moment, so this cap should start as a binding legal target for, say, ten years hence – with clearly defined checkpoints along the way. Once we got there, the government’s hands would be tied.
We should cap the budget deficit – at 3 percent of GDP – and the overall size of the state – at one-third of GDP. Again, these should begin as legally binding targets, to be achieved by a specified date. We should also have clear rules on what the government can borrow for (capital investment) and what it can’t (current spending), and ensure that all government is transparent and ‘on-the-books’.
Finally, we should limit the government’s ability to raise taxes arbitrarily. I’d say that any tax rise not specifically detailed in a governing party’s general election manifesto should have to be approved in a referendum. That, taken together the deficit limit, would make it very difficult for future governments to ramp up spending the way Gordon Brown did.
Of course, it is true that – constitutionally speaking – Parliament cannot bind its successors, so these rules could always be changed at a later date. But the very existence of the rules, and the need to explicitly repeal or amend them, would act as a powerful counter-incentive against ever-larger government.
But that’s all some way off. For now, good luck to Sajid Javid and his National Debt Cap Bill.