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19 June 2024

George Osborne still governs the UK economy

After this election, we need to escape the straitjacket of his 'fiscal rules'.

By Adrian Pabst

Labour and the Conservative Party are refighting the 2015 election. Yesterday, both parties once again polished off their clichés of economic rectitude: Environment Secretary Steve Barclay warned of an impending Labour “tax raid”; shadow Treasury minister Darren Jones diagnosed a “gaping black hole” in Conservative fiscal plans. The goal is to demonstrate an unshakeable commitment to spending constraint. The result will be a failure to repair public services or to restore national prosperity, condemning the country to a full two decades of decline from the 2008 financial crash onwards.

Even Labour’s modest tax policies, delivered as ever in the language of caution and hedge, will not change this. The planned increase of £8.5bn would fund its new spending commitments on education, health and social care. But it leaves the same £18bn shortfall as in the Conservative manifesto, necessitating spending cuts in unprotected departments such as Transport, Justice, Local Government and the Home Office.

This comes at the exact moment that ordinary people are beginning to register how hollow the British state has become: from their collapsing schools and pock-marked roads, to the creakiness of the pavement beneath their feet, not to mention more macro state failures on the NHS and illegal immigration. Further cuts will only worsen the situation, dampening what the economist John Maynard Keynes called the nation’s “animal spirits” or what we now more technocratically label its “consumer confidence”.

But what way is there around this – isn’t Britain trapped in a dilemma between unpopular tax rises or a smaller state? Is the choice really between an even higher burden on working families or a return to austerity that would punish them and the poorest in society? The very framing of this economic debate is antiquated – a continuity Osbornism that has somehow persisted from the early 2010s through to the present. This false choice is only necessitated if the next government sticks rigidly to the fiscal targets of limiting the annual budget deficit to 3 per cent of GDP and reducing debt as a share of GDP over five years.

These rules are in themselves something of a fantasy: all chancellors since Gordon Brown have shifted the goalposts to make their spending plans fit their own rules. But by their nature, they cast a shadow over our economic imagination. And the fundamental problem is that those rules are arbitrary and discourage public investment on which higher economic growth, higher productivity and higher living standards depend.

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Stable public finances depend on the credibility of long-term spending and revenue paths, and on a belief in the underlying health of the economy, not on a constant retrenchment for which there is no overarching economic rationale. For a start, why a 3 per cent budget deficit and not 1 per cent, or 5? In any case, in fiscal policy what matters are economic objectives – greater prosperity and higher living standards based on sustained productivity growth, from which the choice of appropriate instruments follows. Otherwise, rules come to dominate and distort objectives in an absurd triumph of means over ends.

The current fiscal rules discourage the public investment for which Britain is starving because while many projects do boost growth over the medium term, their pay-off does not fall within a five-year window. And with the government failing to take the lead on industrial planning, it is no wonder that the UK has some of the lowest levels of overall investment in the West – a new IPPR report this week placed us bottom of the G7. And the debt target acts as further a brake on public investment as it excludes the impact of projects that would lower the debt-to-GDP ratio beyond the five-year horizon.

This is the logic that has guided British government since the imposition of austerity, if not longer. Under current proposals, it appears it will continue. As per the Tory manifesto, public investment looks set to fall from currently 4 per cent of GDP to just 2 per cent, while under Labour proposals, it will hit just 2.5 per cent – with the Green Prosperity Plan adding £5bn per year or half a percent of GDP. At a time when Britain needs to revive an active state, this is a self-imposed straitjacket. It is the stale fiscal orthodoxy first conceived by Gordon Brown and later cannibalised for political purposes by George Osborne. It involves rules, not objectives, and prioritises selling decimalised deficit figures to the electorate over using economics to pursue social goals.

As always, there are alternatives. First, the next government should remove investment from the deficit and debt targets. Second, it could reassess how it measures the rules by incorporating public sector net worth into its targets – a more comprehensive measure of the public finances that includes both public assets and public liabilities based on what the government owns and what it owes. As domestic public sector net worth is relatively low by comparable international standards, the inclusion of this in a revised fiscal framework would bolster the economic case for higher investment.

Third, and linked to this, the incoming government needs to put forward a credible 10-year plan of public investment to the tune of 5 per cent of GDP a year, which would command the confidence of both the public and the markets. Only then is there hope for a genuine decade of national renewal. The alternative is further stagnation and fiscal duplicity, which will only serve as proof that politicians have learned nothing from the “14 years of failure” Keir Starmer is so keen on referring to.

[See also: How to fix a nation]

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