Labour's Fiscal Policy: Which Horse for Which Course

Abstract

The publication of the Code for Fiscal Stability (CFS) sets out the principles on which the Labour Government intends to conduct fiscal policy. However, there are major weaknesses in the orthodox public finance theory on which much of the CFS is predicated. In particular, there is a lack of congruence between its micro- and macroeconomic elements which raise doubts about the ability of fiscal policy to achieve stated policy objectives. This paper sets out the framework of a dynamic Kaleckian macroeconomic approach to taxation in which the micro- and macroeconomic elements are fully integrated. Kalecki's theory of taxation is integrated with his theories of investment and business cycle. Recent changes in income distribution are seen to have been important in influencing the level of investment. Without a radical change in the thinking behind it, the authors are pessimistic about the scope for fiscal policy in the UK.