Civil Engineering Reference
In-Depth Information
GOVERNMENT POLICY INSTRUMENTS
In their attempts to achieve their macroeconomic objectives, all governments,
regardless of political persuasion, employ the same types of policy instrument.
Again, it is only the emphasis that seems to change. These instruments can be
grouped into three broad policy categories:
• fiscalpolicy
• monetarypolicy
• directpolicy.
Fiscal Policy
In the UK, fiscal policy emanates, on the government's behalf, from HM Treasury.
Fiscal policy
consists largely of taxation (of all forms) and government spending (of
all forms). The word fiscal is derived from the Latin for 'state purse' - and this is
most appropriate as taxation is the main source of income from which governments
finance public spending. In short, fiscal policy is concerned with the flow of
government money in and out of the exchequer.
Important elements of the current fiscal framework are to make sure that both
sides of the government balance sheet are managed efficiently. Any public sector
debt must be held at a prudent and stable level in relation to GDP, and borrowing is
only acceptable to cover capital expenditure. In technical terms, these two Treasury
rules are:
• the
golden rule
, which states that over the economic cycle the government can
only borrow to invest and not to fund current spending
• the
sustainable investment rule
, which states that over the economic cycle
public sector debt expressed as a proportion of GDP must be held at a stable
and prudent level.
Spending that provides goods and services that are to be consumed in the same
year as purchase (such as expenditure on drugs in the NHS) is classed as current
spending. Spending that produces a stream of goods and services for use over several
years (such as funding a new hospital) is classed as capital spending and can be
funded within reasonable parameters by public sector borrowing.
The two Treasury rules provide a benchmark against which the government
can judge its fiscal performance and establish a stable framework for the broader
economy. They provide a framework by which the UK seeks to manage its fiscal
affairs in ways that are transparent, stable, fair and efficient. Excessive government
borrowing creates instability and needs to be kept to an absolute minimum. The
problem is that much of current public sector spending is demand determined
(for example, the expenditure on drugs in the NHS is determined by the levels of
illness that are diagnosed), and much public sector capital spending is politically
determined in the sense that it is committed years in advance (for example, the
hospitals built under PFI schemes incur annual payments that were determined many
years ago). So meeting the government's objective to balance the current public
sector accounts is challenging.
