Why has the Blair Government moved towards a more rules- based fiscal policy? Explain how public expenditure decisions are made and assess whether the government has reverted to a 'tax and spend policies'?

There are visible economic benefits of the fiscal rules based scheme. However the political benefits are also multiple. The spin that the government can place on the income tax stabilisation and also the 'fooling' of the indriect taxes that are not felt for a certain period of time allow the government to appear to be cutting taxes at the same time as increasing public expenditure.  In a negative and cynical light the new rules also allow the government to shift the blame of any of the tough decisions that they have to make to a third party. This is the case with the introduction of the Independence of the Bank of England to set interest rates. This could be seen as a way to end the political business cycle's of the Tory years, however it also allows Brown to have less control over fiscal policy and therefore tie his hands and force certain decisions with the excuse that it is the only option. In this way the stability sand credibility of the government can increase because many of the economic decisions are predetermined through set policy. Some fear that this may lead to the over stability or over credibility of the British economic system. This has been an issue for Ireland and has led to over valuation in the UK. In this way it has contributed to he high exchange rate and this furthered the strife felt by the industrial manufacturing firms in the North of Britain.

The government claims that they have been successful in creating a stable and open macro economic environment. Inflation and unemployment have both remained low with a fluctuation of between 1.8% and 3.2%. However the Labour government have been largely following a spending plan that was thought of by the Tories of which inflation was a primary target. Many of the achievements of the economy have been due to a fortuitous economic climate and the true test of the government will come when the visibility of policy is subject to harder conditions or shocks.

Another way in which the Blair administration has manipulated the information and decision making process is through the depoliticisation of certain areas of government spending. Via fusing aspects of traditional economic management with new initiatives a powerful tool of governing organised on the basis of the principle of depoliticisation has been created. "State managers retain arm's-length control over crucial economic and social processes whilst simultaneously benefiting from the distancing effects of depoliticisation. As a form of politics it seeks to change market expectations regarding the effectiveness and credibility of policy-making in addition to shielding the government from the consequences of unpopular policies." In this way there has been the shift towards the rule based fiscal policies and even if some of the decisions are unpopular there has been somebody, or another area of government to blame, even though the rule based structure allowed no other action. "In contrast with the top-down approach to setting output targets favoured by Tony Blair, the Third Way offers the possibility of a more experimental, pragmatic and decentralised decision-making process—and the local governance network (with elected local councils as pivotal and legitimising actors) is presented as the ideal agent to deliver this."

One aspect of the rules that must not be forgotten however is the flexibility of the system. There is the ability of the government to make rules that are so open to interpretation that Brown can claim to be fulfilling the terms that he has laid down by a reinterpretation of the wording. This can be seen in his balance the budget over the cycle policy where the cycle is an indeterminable entity. In this way the government is able to use the rules to object to an increase in spending while at the same time using the same rules to raise expenditure or claim that there has been an overall increase in spending in one area over the economic cycle. This has become known as the 'Golden Rule of politics' and has resulted in the limiting of borrowing to subsidise only capital expenditure. The well documented five economic tests to the joining of the Euro are flexible enough to allow the chancellor to decide when the UK have met them. Yet these rules and criteria give the perception that the governments hands are tied about the timing of joining or indeed it enables (to some extent) the government to avoid the debate of joining at all.

Immediately after taking office the government decided to make a comprehensive spending review of all of the public and government expenditure with the aim that there would be a severe reduction in the waste in the system. This was completed within a year and was as such not as comprehensive as it may have been but still resulted in cutbacks on some areas. These have included the reduction in the pension schemes and also a withdrawal of state support for the unemployed. The whole emphasis of the Blair government has moved towards the American approach of the workfare schemes where there is only eligibility for subsidies if there is an effort at work or jobseeking. In this way there have been a shift in the priorities away from the caring Nanny State and towards a state of self-sufficiency. This can be seen on the following diagram with reference to the levels of income before and after the welfare to work taxation benefits.

Diagram 1.  

Final Income

  0                                                  Original Income Level

As can be seen in the above diagram, the final income of the worker is originally at A consists solely of benefits, however as the worker starts to earn the taxation's system of the Welfare to work system allow the income to rise to the level B. However there is still a strong disincentive to work due to the small amount of increase in income compared with the level of benefits. This is know as the benefit to wage ratio and it is close to zero then the disincentive to work is huge. Once the worker earns a wage equal to or above C they are then subject to levels of taxation upon that wage. In this way the government have made this system essential to all if they wish to claim any entitlement. This is a completely new way of using the tax system, it means that "the tax man can give money as well as take it". This is an example of the Americanisation of the benefits system but also a cost saving measure.

Formation of policy has also not been as generous towards those sections of society that Labour claim to be helping the most. "Labour's proposals for welfare mean extending means testing and continue the erosion of universal benefits such as the state retirement pension, linked to the amount of National Insurance contributions paid by an individual. Whilst means tested benefits are more expensive to administer, the take-up rate is usually lower than for universal benefits since not all those who are

entitled to claim do so." In this way the low spending of the first term of Labour resulted in extending the hardship of many of the poorest people in Britain whilst the majority of the redistributed money went towards business ventures.

There are five principles that the Government have claimed that they will improve and hold to these are; "stability, transparency, responsibility, fairness (between generations), and efficiency". The aim of adherence to the Code of Fiscal Stability is to ensure that there is the maintenance of low inflation through the control of expectations. This can be shown on diagram 2;

Diagram 2

In the diagram the level of inflation can be measured against unemployment or GDP. As shown on the diagram the Phillips curve can provide a trade off between inflation and unemployment in the short term. However in the Long Run it is the inflation expectations that are the important part in controlling inflation in the economy. 

"In the first term of office [the Blair government] offered a curious picture of a 'tax and not spend' government". As has already been mentioned there was a real increase in the level of taxation by Labour to over double that of the Thatcher years (2.0 to 4.1 respectively) and a less than the growth of GDP increase in the level of public expenditure. Taxes however had to be kept level or be seen to be reduced, to maintain the credibility of government in the first term. Public expenditure in general had to be carefully targeted and not perceived in a similar way to the previous Labour public expenditure escalator.

Labour seemed to be taking a view of withdrawing state intervention in many areas of life and increasing self-reliance or commitment to work.   "Driven initially by the perceived electoral necessity of reinventing the Party's reputation for 'tax and spend' politics, New Labour's commitment to reducing both private taxation and public expenditure subsequently seems to have taken on a new dimension." Blair has also committed the UK to raise the investment levels in the health service up to the levels seen in the rest of Europe, showing that his main priorities of the government are the health service and education. These are areas that the government feels the country is willing to be taxed upon to visibly increase the level of service that is provided. Yet there is a conviction amongst the government that the best allocator or resources is the market. Not in the way the Thatcherites would interpret the market, but the Labour Party's new 'Clause 4' definition. This "extols the virtues of the enterprise of the market and the rigour of competition." .

However the main legacy of the government may be the opposite of these intentions with the repeal of Clause Four seeming to symbolise the presidential style control Blair holds and the "victory of pragmatism over principle". Yet in the recent term there has been a move back towards the old tax and spend policies the RT Hon Michael Portillo states that "Rather than plotting a course for stability, Gordon Brown is plotting an imprudent path in an uncertain world. This Labour Chancellor has no meaningful fiscal disciplines. The Treasury's rules are so weak they offer no effective checks and balances on Gordon Brown's old-style, socialist tax and spend instincts." Yet Brown argues that "I don't believe that the public is any longer fooled by the notion of short-term tax cuts at the expense of long term investment." Although when Portillo states that; The Conservatives "have been right to argue that Gordon Brown's economic policies of higher tax, higher regulation and higher government spending are making Britain less competitive." It may be a justifiable stance that the long-standing divide in ideology between the 'old' Labour 'tax and spend' model and the Conservative stance are no longer so divergent. The main difference now is in the redistributive way that the taxation is spent. One main body of evidence that must be considered is the 2000 budget which saw "the New Labour government choose to use its strong fiscal position primarily to boost spending in core public services (notably healthcare) rather than to make further cuts in rates of income tax." In this way the 'tax and spend' policies of the last labour government seem to have dissipated and have been replaced with a more prudent and redistributive method, at least for the time being.

There has been a noticeable increase in the transparency of the government and where the taxation is put back into the country via public expenditure. However there is also a large amount of grey areas where the chancellor has been able to make changes that are covered by his policies but allow a large amount of room for the government to manoeuvre. In this way much of the blame for unpopular increases and cuts have been put into the hands of the local councils compared with the large increases that the government and Blair have taken personal responsibility for. This government is a presidential style one that is (according to Hennessy) made of concentric rings of influence that all centre around the Blair - Brown alliance. This is a very different type of government to that of Major and Thatcher. There are very few unpopular decisions that have been made that are not blameable on the strict rules that appear essential for the survival of the buoyant economy.

In conclusion the beginning of the government policy was meant to build a reputation of economic stability, this has become an obsession that has led to a system that is all apparently rules based. However behind this façade is a very flexible and malleable system that both Brown and Blair can exploit to their respective economic and political aims. The Blair government has moved towards a more rules based fiscal policy in an attempt to control both the expectations of the city and also disperse the political pressure of unpopular decisions. Public expenditure decisions are made in a very Americanised way with the emphasis on workfare and using the skills of those who may choose not to work, such as single parents. The government started their term cautiously with a move away form the 'tax and spend' era of politics, yet they can be seen to be reverting to this stance. Although at present they appear to have the backing of the country if there is a perceivable increase in the quality of the public services.

Bibliography

• UK policy coordination: The importance of institutional design
  Fiscal Studies; London; Mar 2002; Ashok Bhundia;Gus O'Donnell
• Labour's Economic Policy: Studiously courting competence, by C. Hay and M. Wilson in The Impact of New Labour ed. G. Taylor
• New Labour’s Third Way: pragmatism and governance Temple M Oct 2000 vol. 2 no 3 pp. 302-325(24) British Journal of Politics and International Relations (BJPIR)
• New Labour and the politics of depoliticisation, Burnham P., British Journal of politics and International Relations
• The Prime Minister, the office and its holders since 1945 Hennessy P, Penguin (2001)
• New Labour; The Progressive Future? Ed by Stuart White, Palgrave (2001)
• The Political economy of New Labour, by Colin Hay Manchester University Press, 1999
• Economic Policy in Britain, Wyn Grant, (2002) Palgrave
• Reforming Britain's Economic and Financial Policy by Balls and O'Donnell (eds) 2002
• Speech by Portillo 20/04/2001 .
• Independent, 17th October 2001 as quoted in Grant (2002)

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