Budget battles are nothing new. But the current attempts by so many different countries to tie the hands of tomorrow's profligate politicians are without precedent. Within the euro zone, Germany has already achieved its now legally mandated budget balance. In policy circles, the single biggest exercise in hopeless futility is trying to persuade the Germans to spend a bit more public money. One day their infrastructure will crumble to the point whereby the purse strings will have to be loosened: sadly, few of us will still be alive to witness this.

George Osborne, the UK chancellor, is the latest politician trying to enshrine a balanced budget rule into national law. The UK can't turn fiscal rules into a constitutional imperative since it lacks a constitution, but the Conservative government is trying to bind the hands of future administrations with a law that says the budget must be balanced during 'normal' times.

Play by the rules

The last

Labour

government saw the hapless

Gordon Brown

try to introduce a similar rule, only to then completely ignore it when times became tough. That’s the problem with fiscal laws: they never stick. The

European Commission

gave up years ago trying to persuade

France

to play by the rules.

There are several strands to the debate. A very prominent line of thinking, that government budgets are no different to household budgets, is, at best, mistaken, and, at worst, reveals both ignorance and ideological prejudice. Far too quickly, the debate becomes a morality play. A recent witness in front of the US House budget committee blamed “Keynesianism for the decline in beneficial Victorian fiscal morality”.

This kind of stuff is heard all the time. No serious economist, particularly Keynes, has ever argued for permanent budget deficits. Indeed, no serious modern Keynesian thinks that old-fashioned fiscal activism is a good idea. Monetary policy is widely accepted as being the best way to stabilise economies, with one important caveat. When interest rates are stuck at zero, running a large but temporary deficit can be a very good idea. Otherwise, aim to have a current balanced budget over the cycle. Forcing balanced budgets at all times is both silly and probably harmful. And unachievable. Borrowing for capital spending, done properly, is perfectly OK.

One of the big lessons of the late 20th century was that the task of setting interest rates is beyond most politicians. It’s too tempting to time things to coincide with the electoral cycle and, even when politicians are not so cynical, the task of getting it right is just too hard. So monetary policy was placed in the hands of technocratic central bankers.

Hidden agendas pepper the debate, the biggest one focuses on the appropriate size of the state. George Osborne is relatively open about this: he thinks government should be smaller. It's a view echoed in the US in obvious quarters. It's a question not often asked in Europe at least not explicitly, which is a shame.

The current global debate about budget rules is suggestive that the lesson of the early 21st century (if not before) is that the task of setting spending and taxation priorities is also beyond the technical competence of most democracies. Fiscal policy should also, on this logic at least, be taken away from politicians.

Temptation

Our own contribution to this debate is to show, again, that governments who have to get elected are utterly incapable of resisting the temptation to juice the economy ahead of an election. The only surprise here is why anyone would be surprised by this.

What is interesting is the observation that the global financial crisis has failed to alter human nature. Which, in a sense, is where binding fiscal rules come in.

It would be far better to hand over the policy levers to an agency that is incentivised to get it right. Just like we did with interest rates. The problem with modern democratically elected governments is that they are, in the area of fiscal policy, incentivised to get it precisely wrong. Greece, of course, is the best and biggest current example of this but they are just the worst behaved amongst many. How many examples from our own history does it need to convince us that we can't do fiscal policy – at least not without adult supervision?