The Chancellor should admit in his statement that his rules were misconceived from the start

Autumn Statement wishlist.

Unless he can find some dodge to circumvent them, George Osborne’s fiscal rules are likely to require him to tighten policy in the autumn statement through some combination of spending cuts (such as freezing welfare payments) and tax increases. At a time when the economic recovery is so weak and economists are speculating about the possibility of a ‘triple-dip’ recession this would be folly.

The Chancellor should admit in his statement that his rules were misconceived from the start. The first is, in theory, no constraint at all because it only requires him to forecast that the deficit will be eliminated in five years time, not to ever actually eliminate it. But in practice, he interprets the rule as forcing him to take action now in order to demonstrate he is still on track to achieve his five-year target. The second rule – that debt should be falling by 2015-16 – is a bigger problem; it can only be achieved by more tax increases or spending cuts.

George Osborne should adopt a new rule specifying that the scale of spending cuts will vary according to the strength of the economy. When growth is weak, spending cuts should be scaled back; when it is strong, they should be speeded up. This would increase the credibility of fiscal policy and allow the Chancellor to relax policy in the autumn statement. This should be done through what is clearly a one-off boost to spending, and the best way to do that is by providing additional resources for infrastructure spending in 2013-14.

Tony Dolphin is from the Institute of Public Policy Research

When growth is weak, spending cuts should be scaled back. Photograph: Getty Images

Tony Dolphin is chief economist at IPPR

Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR