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At next month’s Budget, Rishi Sunak, Britain’s chancellor, is planning to unveil a new set of fiscal rules. These would include a commitment for debt to fall as a proportion of national income before the end of the parliament. They are more austere than previous incarnations, limiting the scope for further increases in spending as well as setting down a marker that the Conservative party is still, despite the Covid-related spending splurge, the party of fiscal restraint. A credible medium-term rule is sensible for managing the public finances but constantly changing the framework in this way provides little actual credibility.
Britain’s current rules were set out less than two years ago in the Conservative party manifesto. While not enacted in law the Office for Budget Responsibility, Britain’s fiscal watchdog, assessed the 2020 spring Budget on the basis of these rules before they were rendered moot by the necessity to respond forcefully to the coronavirus pandemic. Then-chancellor Sajid Javid committed to three principles: matching spending on day-to-day matters with current tax revenues over a three-year period, limiting investment to 3 per cent of national income and that if the cost of servicing the national debt rose to 6 per cent of the total tax take the other rules would be revisited.
This combination aimed to adjust Britain’s fiscal stance for a world where interest rates would be lower for longer, as well as to accommodate Prime Minister Boris Johnson’s determination to spend on infrastructure projects and bring an end to the austerity of his predecessors. Sunak, for his part, is now worried that a rise in inflation following the pandemic will lead to higher interest rates and the requirement to hand over more of taxpayers’ hard-earned income to bondholders. July’s public finance figures showed interest payments surging to their highest level on record, partly because of higher payments on inflation-linked bonds.
If these earlier rules, as much as Sunak’s suggested changes, were followed they would still be a guarantee of fiscal sustainability — indeed both commit the government, rightly, not to borrow to fund day-to-day spending. However, constant changes undermine the framework and suggest the rules are nothing more than a means of codifying the current stance of the chancellor rather than a reasoned approach to fiscal policy. Sunak’s plan appears too motivated by a desire to strengthen his negotiating hand in the coming months when discussing the spending review with ministerial colleagues.
While stronger than previously forecast economic growth has meant that public borrowing has proved to be less than the OBR forecast in March — increasing the pressure on the chancellor to loosen the purse strings — the decisive determinant of whether the rules for medium-term borrowing are met or not will be the fiscal watchdog’s estimate of the long-term damage from the pandemic. That is a further argument for Sunak to shore up his predecessor’s rules rather than replace them.
Sunak’s determination to keep borrowing under control, in the face of endless public spending demands, is welcome. He has already balanced higher spending with a package of tax rises, including a higher rate of corporation tax as well as the controversial increase in national insurance contributions announced earlier this month. Revisiting the fiscal rules, however, would be a retrograde move. Not only do the constant changes undermine the whole project but the focus on the level of debt rather than its cost is a mistake. An anchor for public spending is vital, but it needs to actually hold firm.