John McDonnell's decision to oppose Osborne's fiscal charter reminds me of what Winston Churchill said of the Americans: they will always do the right thing after they've exhausted all the alternatives.
The charter commits the government to achieving a surplus on public sector net borrowing by the end of 2019-20, which implies a tightening of around four percentage points of GDP. Mr McDonnell is right to oppose this, on three grounds.
1. It is not state-dependent. If economic growth falters, the charter would exacerbate the slowdown by imposing unnecessary austerity. As Simon has said:
Having to achieve a target at a fixed date whatever shocks hit the economy could be harmful when unexpected shocks occur near that date.
You might object that policy-makers still have counter-cyclical tools they could use such as more QE, a helicopter drop or negative interest rates. Such policies, however, have uncertain effects and so it's hard to know what the correct dosage should be. A less tight and more discretionary fiscal policy which allowed interest rates to rise would give us better protection against recession by allowing for fiscal loosening and interest rate cuts if needed - the effects of which are less uncertain.
2. It could be self-defeating. As Richard says, there is still a global savings glut (or investment dearth). This means that someone, somewhere, must borrow. With real interest rates negative - implying massive demand for gilts - this someone should be the government. If it tries to cut borrowing whilst the rest of the world wants to save, the result will be self-defeating: lower GDP and hence lower tax revenues and higher-than-expected government borrowing. This is, of course, no mere possibility. It is just what's happened. In November 2010, the OBR expected PSNB to be £18bn in 2015-16. It now expects it to be £69.5bn, and even this might be too optimistic.
3. Given the inflation target, a tight fiscal policy implies a loose monetary policy. But this policy mix has at least two possible costs. One is that it can generate financial instability as a search for yield encourages banks and investors to take extra risk. As Larry Summers has said:
Low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely.
The second cost is distributional. Loose monetary policy tends to raise asset prices thus enriching asset holders who tend to be already rich. Fiscal austerity, at least in its current form, however, bears hardest upon the worse off. To this extent, the fiscal charter would increase inequality.
Of course, the Westminster Bubble with its deficit fetishism will regard McDonnell's opposition to the charter as bad politics. Maybe. But let's remember that it is good economics.