The charade of the chancellor holding up his red box of tricks to fix the economy is now well past its sell-by date. The reliably gimmicky process has done little to arrest our recent relative economic decline. Coming alongside the Spending Review, Wednesday’s Budget speech will involve a lopsided analysis of the state of the economy, one or two eye-catching but essentially insignificant showpieces, and a commitment to guard the public purse. Much of this will have been liberally leaked before the event. It will serve neither as an insightful, authoritative view of the structural problems we face nor as a plan for economic regeneration. At best, it will be an accounting exercise by a CFO that focuses on one aspect of the balance sheet but whose proposals cannot, in their current form, support the growth of the economy over time and direct us towards greater and more robust levels of prosperity.
An analogy may help. Broadly speaking, the UK’s current economic policy of levelling up seeks to drive us towards a more prosperous and regionally balanced economy, such as Germany’s. Think of that destination, some 580 miles from London, as the objective. We have then to think about what vehicle(s) we will use to get there, at what speed we will travel and what markers we will use to help guide us to that destination. And we have none of these—no clarity on the instruments we will use and no devices to gauge progress. I may hear you say that fiscal rules can serve as just such a device. In fact, they are so misguided that they are preventing us reaching that destination.
The UK has a troubled history with fiscal rules, which have been endlessly revised since New Labour introduced them in 1997. They tend to be about meeting (and then missing) some level of public debt or deficit by an arbitrary date. Rishi Sunak, having suspended his government’s rules during the pandemic, reportedly now intends to balance current spending and reduce the public debt burden by the end of the parliamentary term.
The deficit is the outcome of the difference between spending and tax revenues, and the chancellor’s choices can vary its size. It is therefore an instrument of policy. The target of policy should be national prosperity, and the deficit should be used as an instrument in whatever form we think will allow us to meet our target. The fiscal rules place an arbitrary constraint in the way of policy. It is like deciding to randomly limit the fuel in your tank before driving to your new destination. Budget after budget we seem to have got no nearer to Germany.
Can you imagine, for example, the Monetary Policy Committee of the Bank of England saying that regardless of its inflation target, it will set Bank Rate at 1 per cent come the next election? Such a statement that confuses instruments with targets just politicises the business cycle, and stops the tools of economic policy responding to shocks and events as they emerge. Such rules are therefore doomed to failure, as our own fiscal rules have regularly been, and end up undermining the credibility of our economic institutions. They lead to more, not less, variance in economic outcomes. So how do we correct our path?
The chancellor had previously announced a review of the fiscal rules, with further decisions due this autumn.
But the risk is that we end up doubling down on a failed approach, here and elsewhere. Plans on tax and spend should explain how they respond to the current and prospective needs of the economy and be subject to more than the descriptive analysis undertaken by the Office for Budget Responsibility. And we also need to use more formal normative analysis that assesses the implications of other policy choices, and conditions plans on the most recent snapshots we have of the economy.
Crucially, we ought to examine the whole government balance sheet of assets and liabilities as part of a more comprehensive annual assessment of the state of the economy. With such an analysis the government could turn the agenda of regional regeneration into practical reality, by setting out the gaps that we see in regional capital and labour skills and showing how to address them over time. We can then assess our national progress. The focus of the chancellor’s work should be here, in the details of economic policy and progress, not in the round of media leaks that is already underway. The current addiction to ad hoc policymaking at HMT has not served this country well. As a result, we are running out of gas.
