Former Labor Prime Minister Dennis Healy famously quipped that the first law of politics is: “When you’re stuck in a hole, stop digging.” This advice may help Rachel Reeves as she prepares to submit her first budget later this month. Leaked information suggests that the process is not going smoothly. Mr. Reeves faces pushback from both sides. Left-leaning ministers are furious about impending budget cuts, while right-wing Conservatives have accused Mr Reeves of breaking his manifesto promise not to raise national insurance for employers. His fiscal strategy is at the center of criticism. Reeves has promised “no return to austerity,” but her fiscal rules appear to point to either higher taxes or stealth cuts to departmental budgets. The Institute for Fiscal Studies (IFS) believes the Chancellor needs £25bn a year. The economy is improving. But there are few options other than increasing taxes. The pandemic has shrunk the number of workers and reduced economic headroom, limiting the government’s ability to print money and “fund” spending.
There are also broader issues of equity and efficiency. Raising taxes could lead to less wasteful government spending, while targeting the wealthy could reduce environmentally harmful practices, such as the use of private jets. This will free up resources for critical investment in infrastructure and increasing the purchasing power of public sector workers. But Reeves still needs to provide a clear and consistent message on the tax system, leaving the public uncertain about her intentions.
Rather than focusing on the tax system, the discussion turned to Reeves’ fiscal rules and whether they could change in the next budget. The IFS estimates that even if she eases debt rules to allow for more investment spending, the £25bn shortfall needed to avoid austerity will persist. “Day-to-day costs have to be covered by income,” Reeves insists. In contrast, New Labour’s fiscal approach aimed to balance the budget ‘over the cycle’. The IFS believes the Chancellor needs to seek to balance spending “in the medium term”. This is important. Without such a long-term commitment, an additional £20bn of cuts and tax increases could be made this year.
Reeves also has other options. He could exclude from the “deficit” rules transfers from the government to the Bank of England intended to offset losses from the lifting of the quantitative easing program. This would free up £7 billion a year to current spending. But what value are fiscal rules if they can be changed whenever it is politically expedient? Jagjit S. We are proposing solutions.
Instead of relying on self-imposed fiscal rules, where “noncompliance is more respected than compliance”, Professor Chadha suggests a more transparent approach. He suggests that the Treasury should publish a summary of the government’s balance sheet, showing how ministerial decisions have affected national income. Additionally, a speech on “economic conditions” could outline areas of progress and failure. That way, he argues, the chancellor will be held accountable for actual economic performance, rather than consistently inaccurate forecasts. Given that seven different fiscal rules have been in place in the UK since 2010, the risk of scrapping the current rules seems minimal. The country faces pressures arising from an aging population and net-zero demands. Meeting these challenges requires new approaches. Professor Chadha’s proposals would bring about significant improvements, particularly in the UK, which is in dire need of economic repair.
