Whatever their weaknesses – and they inevitably all have some – it is only right for a country to establish and follow a set of rules for fiscal policy.
The Burnham administration’s decision to adopt the exact framework of its predecessor makes sense, especially when it comes to the stability rule: day-to-day spending being met by revenues.
For a nation that has, for various reasons, managed to increase government spending rapidly over the past decade and more, it is important that current spending is now subject to self-imposed constraints.
If the government decides to increase it further, it is only right that taxes are used to fund such an increase – and that voters are granted the opportunity to choose whether this is something they support.
Personally, I would prefer the government to be tougher on some aspects of current spending, as I have articulated publicly in recent months, particularly in the areas of pension provision and welfare. But, if the government decides differently, and also wants to boost spending elsewhere, then it will have to raise taxes. I would not favour further increases in taxes on business, nor equalising capital gains tax, as both measures would be harmful to the government’s ambition on boosting growth.
Where I would be more ambitious is on the second fiscal rule surrounding investment. To her underappreciated credit, the previous chancellor, Rachel Reeves, admirably introduced a framework that not only protected public investment spending but allowed somewhat greater scope for it.
In order to build the physical, and very possibly human, infrastructure the UK needs for the future, there are many areas of investment where government is highly likely to be the only potential source of funding.
Indeed, there are many where it should be. That will inevitably mean an increase in the issuance of gilts in the near to medium term.
But here’s the crucial point: to do so while not merely maintaining but boosting credibility with the public and financial markets, we need a better way of deciding what constitutes worthwhile investment.
I have been recommending that the National Infrastructure and Service Transformation Authority (NISTA) should be taken out of the Treasury and turned into an independent, transparent body – an infrastructure equivalent of the OBR, so to speak.
Governments cannot simply say, “trust me, I know best”, to both sceptical voters and equally sceptical financial markets. Not least because governments typically don’t know best.
Instead, what we need is a body that has real expertise, that regularly assesses a significant pipeline of infrastructure projects, presenting each in a way that its long-term benefits of investment – or lack thereof – are clear.
Economists would describe this as identifying and supporting the projects with “positive multipliers”. The larger the multiplier, the stronger the case for government borrowing to fund the investment. Such an approach will increase the trend rate of growth of the economy and reduce medium- to long-term debt, rather than increasing it.
Getting that distinction right is, in my view, central to the country escaping the low-growth, rising-debt trap we have been caught in ever since the 2008 financial crisis.
This article first appeared in Spotlight on Economic Growth: Rethinking New Paths to Prosperity
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