MORE and more people see the madness behind the fiscal rules in the UK. Fiscal rules constrain government spending to around 3% annual deficit and 60% overall debt to GDP. Let’s explain the method behind the madness.

Earlier this week, Sky News's Ed Conway took three minutes to explain the "fiscal headroom" that Rachel Reeves is trying to find ahead of the budget at the end of the month.

Fiscal headroom (a term you will never see in any economics textbook – even neoclassical ones) is the amount of money the government can spend without breaking the rules it has set for itself. It is hard to listen to Ed’s explanation without laughing.

(Image: PA)

Ed managed not to break a smile, even when he said: “If Rachel Reeves wants to try and find extra headroom, she could use a different measure for the national debt. I know that sounds strange, ok..."

Too right, it does! So, the UK Government can change the “headroom” depending on the totally arbitrary way it measures it. And governments regularly change this made-up rule.

Ed shows us how four measurements take us from £24.9 billion “headroom” to £66.8bn. It comes across as mad as a Monty Python sketch. But of course, it is deadly serious. Tough decisions to keep to the lower headroom figure include the £1.4bn of possible savings from cutting the winter fuel allowance for pensioners.

The rules can’t be important, or they wouldn’t be so malleable. When you issue your own currency, the level of deficit and debt to GDP has little or no impact on the economy. They are economically unimportant.

Evidence suggests that countries with no fiscal rules (Switzerland and Australia) or nations that run more than 3% annual deficits (USA) or have a much higher debt-to-GDP ratio (France, USA, Canada, Japan at more than 250%!) do not perform poorer than those nations with fiscal rules.

As it is generally a good thing to net save, MMT economists believe an annual deficit is essential for a healthy economy. Remember, when the government runs a surplus, it takes back more financial wealth than it releases into the economy: Its surplus is your deficit.

Sometimes, deficits are too high, but they can also be too low. It all depends on what the money is being used for and the position of the private sector. Making up rules to constrain them is counterproductive to growth, the normal target for most economics and wellbeing.

Fiscal rules are relatively new. They only became “a thing” in the early 1990s. The designers of the euro were worried that certain countries would spend (the global south) while the more austere and sensible nations in the north would save.

(Image: Scotonomics)

In what can be described as racist terms, fiscal rules were introduced to keep the southern nations in check. These debt and deficit rules would tighten the spending percentages (not the amounts, of course, as northern countries would be able to continue to outspend the southern nations) in the different economies that would join the euro.

Fiscal rules became central to the European project. Neoliberal governments like to flock together, and many other countries have adopted them. So, how did the EU come up with that 3% rule?

Dirk Ehnts (below), an expert on the European Union’s finances, explains: “It was some bureaucrats from the ministry of finance in France who said 'I think 3% would be a good number'. At no point did they read some literature or some kind of paper”.

See the full explanation here.

This conversation took place in the back of a car. France had historically had a deficit of around 3%, so the bureaucrats couldn’t suggest a lower figure without getting into trouble back at the office.

It was a "finger in the air" figure that would be politically acceptable. There was no economic theory or modelling. Two per cent was too low, and 5% was too high. So 3% it was. Did you know the UK Government has decided how much to tax and spend owing to this made-up figure? Can you see the farce after farce at the heart of the UK treasury?

Coming up with that number seems unbelievable unless you understand the institutions at the heart of our economy. The fiscal rules concept kept welfare spending relatively low, so most neoliberal governments were happy to follow it. Fiscal rules pushed on an open door. Like austerity, if it protects wealth, the bar (if there is one at all) is set ridiculously low on "certain" economic theories. Our report on austerity gives a detailed reminder of how easily fiscal austerity was undertaken in the UK.

Economists from non-neoclassical schools have pointed out the fallacy and stupidity of fiscal rules since their inception. Economists like Professor Steve Keen have detailed the fallacy in the assumptions which underpin these rules, principally that at some point, the creator of a currency must collect every currency unit it released through tax. It hasn’t happened in 300 years.

Currently, the public debt is the size of the UK’s GDP. So, to clear that debt, we would all have to live on nothing for a year. The economic theory behind fiscal rules is so porous that they are not even internally consistent. Steven Keen expands on this in this short interview.

Thankfully, more people are listening to economists who understand the economy in the "real world". Fiscal rules and targeting a government budget surplus prevent us from achieving meaningful targets, like full employment. We need to abandon them.

Instead, the run-up to the Budget is dominated by talk of black holes, headroom and fiscal rules instead of conversations and plans for equality, real wage increases, poverty reduction, resilience and achieving our climate targets.

At some point, enough people will stop laughing. Then, we can start to turn around our economy and improve the wellbeing of all.