Posted by: aboutalbion | October 17, 2012

Fiscal conservatism

Well, what do you know … I’ve discovered that my hobby-horse has got a name.

In the past few months, I have been blogging about the size of the UK national debt (around £1 trillion) and that no one seems to mind too much if it gets a little bit bigger.  I do mind, and I would like to see it reduced towards zero (on the average) over a generation or two.

Over last weekend, I came across a signpost to ‘fiscal conservatism’.  And I find that ‘fiscal conservatism’ [FC] is a respectable set of fiscal ideas whose objectives are (a) to endorse balanced national budgets, and (b) to reduce the national debt.  The debate about these ideas seems to have originated in the US about two hundred years ago.

FC is a political standpoint that gives priority to economic policy over social policy.  I could imagine that FC occurs in a ‘soft’ form (where attention is paid to just balancing a national budget year on year) and a ‘hard’ form (where some funds in a balanced budget are reserved for reducing the national debt year on year).  I favour the ‘hard’ form of FC.

Although FC had its heyday around two centuries ago in the US, I visited a UK discussion website (that is pro-Europe) for a taste of where FC is today.

The article I found wished to distinguish bad debt from good debt.  It argued that ‘worthwhile investment’ could be paid for with borrowed money that could (in turn) be regarded as good debt, and that such good debt was sustainable.

The definition of a worthwhile investment is that the expected return is higher than the cost of the capital you need for this investment. In other words, the investment pays for itself and makes a profit. No matter how big your debt burden is, you should pursue every single opportunity for which the above is true. Investors will not lose confidence in this case as your investment portfolio creates higher returns than you have to pay in interest so the debt is easily serviceable. In this case you create more assets than liabilities in your balance sheet.  …  So on this basis it is just wrong to bedevil all kinds of debt. There is good debt and there is bad debt and the distinction is crucial.”

This seems to be a current attempt to justify ignoring the ‘rules‘ of FC, by declaring that the profitable return from a “worthwhile opportunity” is available to repay the good debt.

What I notice about this extract is that it assumes that there is a way of discerning a “worthwhile investment” opportunity at the pre-launch business plan stage.  Do some people have access to the future?  Really … really?  Surely, if there was a way of picking investment ‘winners’, the banks would have adopted it by now and there wouldn’t have been a banking crisis in 2008, etc.  Reluctantly, I find this whole extract to be a description of an unattainable economic paradise that never occurs in practice.  For me, debt only occurs in one form … debt.

I hope to pay more attention to ‘fiscal conservatism’ in the future.


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