This new fiscal rule could save the Conservative Party

Paradoxically, the political strengths of the new rule are also its biggest policy weaknesses.

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What’s the future of Conservative economic policy? That’s one of the topics that ought to be at the heart of their leadership election, but isn’t, because of questions like “What about the Brexit Party?” and, “How are we going to get out of this hole?” 

The policy and political challenge the party has is pretty clear: it needs to find some way to move on from spending retrenchment, because public fatigue with the cuts is already pretty high, there is a large body of evidence to suggest that it cannot win support for both Brexit and further cuts in public expenditure, but it needs to find a way it can do that without abandoning the politically lucrative position of being able to paint the Labour Party as fiscally irresponsible or, worse, conceding that the previous nine years of spending restraint is a political choice, not an economic necessity.

In a new report for the centre-right think tank Onward, Neil O’Brien, a former economic advisor to Theresa May and George Osborne, now MP for Harborough, has an interesting way forward for the party: a new fiscal rule that does both: unlocking additional amounts of public spending while allowing it to build on, rather than disavow, its near-decade in office.

The new rule, instead of seeking to reduce debt as a share of GDP, would merely target that it remain flat or falling. There are several reasons why adopting this rule would immediately improve life for the Conservative Party. The policy reason is obvious: it instantly frees the party from the need to seek further and deeper cuts and instead gives them a cool extra £190bn to spend over the next four years, whether on increased public spending or on tax cuts. To put that into context: it is more per year than the schools budget, and close to two-thirds of the extra spending promised by Labour. It’s a game changer in terms of what a Conservative government could do between now and the next election.

Paradoxically, the political strengths of the new rule are also its biggest policy weaknesses: they are, from an economic perspective, less sensible than Labour’s fiscal rule, but you can see how those weaknesses can be parlayed into attack lines.

That weakness? It makes no provision to treat infrastructure spending – like public transport or house-building – as different from day-to-day spending. The argument in favour of doing this is that it encourages dodgy accounting by counting all sorts of odd things as infrastructure. The argument against is that, if you don't separate the two, politicians will always choose the immediately popular hit of day-to-day tax cuts and spending increases over infrastructure spend. 

More importantly, it has little to say explicitly about what government spending priorities and targets should be in an economic downturn, while Labour’s explicitly allows a government to borrow more in times of recession. The implicit argument of the paper is that, in a downturn, the target would go out the window – but by leaving it implicit it would allow a Conservative leader to argue that Labour’s spending plans contain “hidden” or “unlimited” borrowing whether through its break clause in an economic downturn or through its blank cheque for infrastructure. If anything, the reverse is true: the lack of clarity over what this rule means in a downturn allows for hidden borrowing, or deeper cuts than advertised in a recession. But the attack line is there and is potentially potent. 

Taken together, it makes for what could be a game-changing alteration in Tory economic policy: provided, that is, that the next leader can somehow achieve a resolution to the Brexit crisis that doesn’t force an election, whether thanks to the intransigence of their own backbenchers or the opposition of the DUP to the backstop, an essential part of any negotiated Brexit.

Stephen Bush is political editor of the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.