Economic Models - Convex Optimization

The Advantages of Fiscal Leadership in an Economy 75
The short-run discretionary components are negligible (p. 59, Table 5.5),
and the long-run objectives of the policy will always take precedence in
cases of conflict (pp. 61, 63–68). Fiscal policy would, therefore, not be
used for fine tuning (pp. 11, 63), or for stabilization (pp. 1, 14). This burden
will be carried by interest rates, given the fiscal stance and its forward plans
(pp. 1, 7, 11, 37).
Third, given the evidence that consumers and firms often do not look
forward efficiently and may be credit-constrained, and also that the impacts
of the fiscal policy are uncertain and have variable lags (pp. 19, 26, 48;
Taylor, 2000), it makes sense for the fiscal policy to be used consistently
and sparingly and in a way that is clearly identified with the long-term
objectives. The United Kingdom has determined these objectives to be (pp.
11–13, 39–41, 61–63, 81–82):
(a) The achievement of sustainable public finances in the long term; low
debt (40% of GDP) and symmetric stabilization over the cycle.
(b) A sustainable and improving delivery of public services (health and education);
improving competitiveness/supply-side efficiency in the long
term; and the preservation of social (and inter-generational) equity and
alleviation of poverty.
(c) Recognition that the achievement of these objectives is often contractual
and cannot easily be reversed once committed. The long lead times
needed to build up these programs mean that the necessary commitments
must be made well in advance. Frequent changes would conflict
with the government’s medium-term sustainability objectives, and cannot
be fulfilled. Similarly, changes in direct taxes will affect both equity
and efficiency, and should seldom be made.
(d) The formulation of clear numerical objectives is consistent with these
goals; a transparent set of institutional rules to achieve them; and a commitment
to a clear separation of these goals from economic stabilization
around the cycle. 8
(e) To ensure that fiscal policy can operate along these lines, public expenditures
are planned with fixed three-year departmental expenditure limits
which, when combined with decision and implementation lags of up
to two years, means that the bulk of the fiscal policy has to be planned
8 The credibility of fiscal policy, and by extension an independent monetary policy, is seen as
depending on these steps, and on symmetric stabilization. See also Dixit (2001), and Dixit
and Lambertini (2003).