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Thursday, April 10, 2003

Budget Day

Overshadowed by the momentous events in Baghdad, British Chancellor of the Exchequer Gordon Brown yesterday delivered his budget for the 2003 fiscal year. I don't wish to comment on the budget; every British newspaper--and some foreign ones as well--has people far more qualified and interested than me to address the particulars, and a perusal of them tomorrow will be more than adequate for this. What interests me, though, is the whole idea of the budget presentation itself.

Four years ago and 4000 miles away, back when I worked in a television newsroom in Trinidad, the budget presentation was a big event, and to this day still is. (This has some to do with the fact that there is no throne or state of the nation speech in Trinidad, so a lot of the government's policies get announced on budget day.) The media covers it well, with post-Speech panel discussions and much commentary in newspapers. That particular year, though, the then Finance Minister, Brian Kuei Tung (now charged with corruption, but that's a different story) had the temerity to announce that he had levied no new taxes, and had cut no existing taxes.

The senior producer was at a loss. "He said nothing" he cried. Not, stricly speaking, true--the speech was in fact his longest ever, at 72 minutes (I time-coded it for editing) and he announced a number of initiatives. Nevertheless the panel that we had organised had little to discuss, and our locaton crew scurried around the public gallery of Parliament to gather the reactions of interest groups who had received/been denied state largesse. All in all, a poor show.

Brown announced a lot on Wednesday, but that did not stop people from saying that his speech in the Commons was boring. This is perhaps because it was unsurprising. A budget speech is an expectations game--the question "what will he say?" is much speculated upon in the weeks in the run up to it. Finance ministers love this "budget theatre" and many, not only in the media, eagerly play it. Most of the attention, though, is on the microeconomic side, and can be seen by a look at one of the many laundry lists of budget proposals. Brown he did as was expected, but that was not enough. People want to be surprised--pleasanly surprised, whatever your position or ideological perspective. This leads to inevitable disappointment for some.

Under a rational expectations assumption (not the full hypothesis, note) people cannot be systematically fooled, and they they think though the model of the economy; people cannot expect a surprise shock, favourable or not, as they would already factor it into their decisonmaking. Budget speeches are annual shocks, and while one can predict the frequency, one cannot forsee the nature of those shocks. I wonder, though, why an institution for the purposeful creation of microeconomic shocks exists. Random macroeconomic shocks, like a spike in oil prices, are one thing, and policy needs to be accomodated to it. The major effect of microeconomic shocks is to create uncertainty (probably uninentional) and skew incentives (most likely deliberate). A strong case can be made for doing adjusting principally to macroeconomic problems, adjusting tax rates and public sector borrowing as conditions chages, while concentrating microeconomic interventions on long-run issues, as Britain's utility regulators, for example have done.

No such luck. Brown has accumulated a lot of power to his office--anything that even slightly touches economics comes within his department's remit. With an attitude like that, one wonders if the Chancellor will ever be satisfied--when he, in turn, will have nothing much to say.