skidelsky185_Wiktor SzymanowiczAnadolu Agency via Getty Images_jeremyhunt Wiktor Szymanowicz/Anadolu Agency via Getty Images

Can Governments Still Steer the Economy?

Inflation and growth rates are increasingly determined by global events over which national policymakers have no control. Instead of clinging to the illusion that they can control the uncontrollable, governments should use fiscal policy to protect their most vulnerable citizens from disruptive external shocks.

LONDON – In 1969, the British financial journalist Samuel Brittan published a book called Steering the Economy: The Role of the Treasury. At the time, it was still widely assumed that the United Kingdom’s economy was steerable and that the Treasury (which was still in charge of monetary policy) was at the helm.

Back then, the Treasury’s macroeconomic model, which calculated national income as the sum of consumption, investment, and government spending, effectively made the budget the regulator of economic performance. By varying its own spending and taxation, the Treasury could nudge the UK toward full employment, real GDP growth, and low inflation. Subsequent models, influenced by the monetarist and New Classical revolutions in economic theory, have since reduced the state’s capacity to intervene. Yet the belief that governments are responsible for economic performance still runs deep.

The UK’s recent budget announcement is a case in point. When presenting his budget to Parliament this month, Chancellor of the Exchequer Jeremy Hunt sought to reassure lawmakers that the government is on track to tame inflation, reduce debt, and boost economic growth. Hunt even went so far as to present detailed predictions for each of the next five years. As he put it, “We are following the plan, and the plan is working.” Yet, it has long been clear that inflation and growth depend on global trends over which the British chancellor has no control.