The papers today are full of stories of George Osborne, after six years at the helm, having to deal with the consequences of his own failures on the economy.
The FT reports show he faces an £18bn black hole in his public finances plans. The official size of the UK economy last year was one per cent smaller than predicted by the OBR in November. Debt as a percentage of GDP has gone up from 62 per cent to 80 per cent under his watch. The shortfall in tax receipts is now set to deal another blow to the Chancellor’s plans to see a surplus by the end of this Parliament.
Yet again there are rumours of cuts for the most vulnerable. Support for over 600,000 with disabilities is set to be cut by over £1bn – threatening the very independence of living that the Chancellor might suggest he stands for.
Osborne’s failure on the economy – on his own growth and deficit targets, on weaknesses in our productivity, the fall in our ranking by the World Economic Forum on the quality of our infrastructure – set the context for the new fiscal credibility rule that John McDonnell has announced this week.
A huge question for Labour to address is our economic credibility. Political parties need to continue to earn the trust of the public on our taxes and with the management of the economy.
Excessive government borrowing hurts us all. We cannot pretend that there is a magic money tree or that someone else will always foot the bill. And every penny misspent by government is a penny wasted.
Fiscal responsibility is in the best traditions of Labour. It is in the tradition of the friendly societies and the early co-operatives. Our focus on entrepreneurship and support for business – just look at Chuka Umunna’s success in bringing Small Business Saturday to the UK – is clear. Labour has always been the party of the real wealth creators – the clue is in the name. We need to get back to being a party that is seen to focus on how we earn, not just how we spend.
Nor has George Osborne learned the lessons of the global financial crisis. Yes, it happened on our watch, but it was a global financial crisis, not just a British one. The primary cause was reckless lending by banks particularly in America. The Conservatives had wanted less financial regulation than Labour before the crisis, but appeared to share the post-crisis cross-party consensus that lack of regulation needed a strong and coordinated policy response. We led moves to tighten up the rules. Yet light-touch regulation is exactly what Osborne is going back to, unwinding controls put in place since the crisis.
This week we saw that business investment is slowing. But Osborne’s poorly-designed “fiscal charter” ties the government’s hands from investing in the vital infrastructure, like rail and high-speed broadband, that we need to secure our future prosperity. International research shows that fewer trains are running on time, more trains in rush hour are overcrowded and the number of local buses has fallen by 2.5 per cent since 2010.
Osborne’s charter was rightly criticised in October for four key reasons. It was seen as a politically motivated target that will join his list of fiscal targets that have come and gone. It left the government inflexible to changing economic circumstances. It was set to see households, consumers and business borrowing more to bring balance to the economy – with official data showing this to now be true. And it reduced the room to allow for capital investment.
Labour’s proposed new fiscal credibility rule addresses those concerns head on. It’s part of showing there is an alternative to George Osborne and his short term politics which are bringing a long term cost to us all.
When a growing coalition of the IMF, the OECD, the G20, the CBI, the TUC and business leaders from all sectors are insisting governments must invest, for Osborne to be planning to reduce government investment as a share of GDP is irresponsible.
Our challenge, however, is to ensure we have a better rule that will allow government to invest wisely and effectively, but maintain the iron discipline needed to bring down the debt and eliminate the deficit.
The new fiscal credibility rule has been developed in consultation with world-leading economists, both from Labour’s Economic Advisory Council, and outside. It has four key points. First, Labour in government will eliminate the deficit on current spending over a five year target period. Current spending is day-to-day spending by government on things like wages and heating costs. There is no economic case for maintaining a persistent and large deficit on current spending. You wouldn’t pay your rent on your credit card, and neither should the government.
Second, we are reinforcing this strict rule with an absolute commitment to seeing the government’s debt burden fall by the end of each Parliament.
Third, we are proposing to put the OBR entirely outside of any possible ministerial influence, and change its mandate to report directly to parliament, with a duty to blow the whistle on any government breaching the rules. We have to make sure that our decisions are transparent and accountable, and always will be.
Finally, we have recognised how the economic landscape has shifted since 2008. Economists and central bankers across the world now recognise that the kind of monetary policy framework we had before the global financial crisis is not meeting the demands from the unprecedented macroeconomic circumstances we are in. The last part of the fiscal credibility rule recognises that when conventional monetary policy is no longer able to provide effective levers for necessary stimulus, that we need the option of fiscal policy working alongside it. We are proposing that Bank of England’s monetary policy committee would have decision-making powers on when the limits of conventional monetary policy have been reached, just as they now independently decide on interest rates.
Our fiscal credibility rule is the first, important, step back to earning the public’s trust with the nation’s finances. It is backed by experts including Nobel Prize-winner Joseph Stiglitz, who said it is “a credible and sensible one for managing the nation’s finances responsibly, whilst supporting sustainable economic growth.” We have many more steps to take. But with Osborne’s failed plans leaving us more exposed to a slowing and uncertain world economy we have a responsibility now to take them.