The UK has had seven sets of fiscal rules since 2010. In a study comparing it with 34 peer nations since 1985, Britain not only changed its rules more frequently but they also had shorter lives. Clearly fiscal rules are not immutable laws of nature but arbitrary, human-made restraints. Implicit in this model is a dim view of human nature: that politicians cannot be trusted to resist the temptation to abuse government spending programmes for political or ideological ends. The result is that, instead of a political leadership that spends too much, Britain has politicians who spend too little.
This is no way to run a country when there is urgent social repair needed. Instead, on Wednesday, Jeremy Hunt appears ready to deliver a budget full of tax giveaways and cuts to struggling public services to meet his fiscal rules. Labour should offer an alternative. Unfortunately, the shadow chancellor, Rachel Reeves, echoed Mr Hunt’s narrative and ditched the party’s flagship £28bn green investment pledge.
This act of economic and environmental vandalism is because Ms Reeves does not want to be accused of profligacy and appears to have adopted the Tories’ gloomy debt pledge. Ms Reeves, like the chancellor, seems to want debt as a percentage of national income to be forecast to fall in five years. In practice this rule is so vague it can be met without debt ever actually falling as a share of GDP.
The upshot is a draining debate around “fiscal headroom”, which is what the Office for Budget Responsibility (OBR) says will be the national debt four years hence, minus the national debt five years hence. To cover the estimated £13bn cost of Mr Hunt’s tax cuts means there is forecast to be less public investment, fewer parks and libraries, longer waits for court dates and more violence in jails. To ensure the health of the economy, there must be a better way of deciding how much the government should be borrowing and spending.
Both Andy Haldane, the Bank of England’s former chief economist, and Lord O’Neill, who served in George Osborne’s Treasury, argue that the current rules need a shake up. But do we need them at all? Tim Leunig, who advised Rishi Sunak as chancellor, suggests replacing fiscal rules with a 250-word OBR-approved summary of Britain’s economic position at the budget, and the effect of the government’s proposals on that position. He argues that a chancellor “who spent more on proven investments, whether that is capital, or improving education, or getting people back into work” could then defend them on the basis that they would benefit the economy. It’s not a bad idea.
Britain faces a lost decade unless it updates its governance framework. The next government will face pressure arising from an ageing society and the need to make up lost ground on net zero. The lack of available productive resources suggests that tax rises will be required to meet the challenge. The economist Daniela Gabor notes that the Bank of England will deplete Treasury coffers to boost commercial bank profits to the tune of £110bn during the next government. Taxing those sums effectively would provide resources to tackle the voter priorities of fixing a crumbling public realm and reducing sky-high NHS waiting lists. This approach might seem radical, but it is better. As John Maynard Keynes put it: “The new plan is required to satisfy ideals of social justice much higher than we have been attaining without it.”
