Transparent Frameworks, Fiscal Rules and Policy-Making Under Uncertainty

Abstract

Kilpatrick examines UK past economic policy and notes its problems in terms of instability, imprecise objectives and poor coordination of policies. He describes the recent reforms aimed at increasing transparency and accountability of fiscal policy, introducing firm fiscal rules and establishing an independent monetary policy. He points to the crucial role of the Code for Fiscal Stability introduced in 1998 which specifies principles of fiscal management and transparency standards. Kilpatrick emphasises the joint roles of transparency and rules in promoting fiscal discipline and better policies in a democracy. Rules can offset political pressures towards higher deficit levels and improve the credibility of government’s commitments. Transparency can obviate to one of the main problems of rules, that is the potential lack of flexibility. He notes that there is a trade off between the credibility of policies and the flexibility in their implementation. Transparency can allow more of the latter without losing the former. He states that capital spending ought to be financed through borrowing but within limits set by the need to restrain debt levels. Finally, he stresses the inherent uncertainty of budgetary projections and trends and points to the need for a cautious approach in setting targets and implementing rules.