Balanced Budget Rule

Stewart Hosie Excerpts

Wednesday 23rd January 2019 Westminster Hall

[Stewart Hosie (Dundee East) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Stringer, and to take part in this debate. I congratulate the hon. Member for North East Derbyshire (Lee Rowley) on securing this debate, not least because we all want the debt, deficit and borrowing to come down to sustainable levels—there is no disagreement about that objective. At the end of his speech, he spoke about flexibility and not harking back to the debates of 10 years ago. We supported the New Zealand model that allows for maximum flexibility for a shock, while trying to reduce the debt and deficit, and we still think it has considerable merit.

While not wishing to be at all partisan, I must take issue with the hon. Gentleman in one regard, which is that one generation’s spending paid for by the next is not a characteristic of much of our investment. Roads, rails, bridges, water, sewerage, long-term health improvement, education and even paying the state pension to those who have already contributed are intergenerational investments, and I would not characterise them as being a burden on, rather than an investment for, the next generation. The hon. Gentleman and the hon. Member for Cheltenham (Alex Chalk) spoke about morality, but there is nothing inherently immoral about borrowing if it is to fund that intergenerational investment.

I wish, rhetorically, to ask a series of questions. How do we do this? How do we run a balanced budget? What would the mechanism be? It strikes me that there are three ways that one could begin to do it. First, we could set hard targets, but if the downturn comes unexpectedly, if the revenue yield is lower than anticipated or if the money runs out, there are a number of options. We could simply stop spending, leaving a half-built bridge, road or railway, with unpaid pensions and cuts to welfare, but that would be socially, economically and politically undesirable. We could ignore the failure and carry on spending, or we could have a hybrid rule akin to the welfare cap, and the poor Minister would have to report to Parliament on why they going to make were cuts or ignore the rule and keep on spending.

In any event, there are likely to be in-year budget changes. In-year budget cuts in Westminster had an immediate impact and drove a coach and horses through the already set, voted on and agreed Scottish Parliament budget. If that is multiplied across the Welsh Assembly, Northern Ireland, and every local authority and other public body, an in-year change has a sudden and profound cascading effect on every recipient of public cash in the country—again, that is politically, economically and socially damaging.

As we have seen, the setting of a hard budget creates a perverse disincentive to hoard cash. No politician has not struggled to get cash from one public body or another in June, July, August or September, but then found a huge splurge of cash towards the end of the financial year. I bet my bottom dollar that if money is spent in that way it results in—how can I put this gently?—not quite optimum value for money.

To get round that, we currently budget against future forecasts, but if GDP is lower—for whatever reason—or if the tax yield is lower, or if the public finances and fiscal numbers are not what they might be, we are left again with a number of options. We can stop spending, which is bad. We can have in-year changes, which are undesirable. We can also allow automatic stabilisers to take their course. That normally happens for a good reason, but the budget rule is then breached. We could introduce a corollary to the Bank of England failing to meet the inflation target, with some kind of letter or report to the House of Commons. If that happened too often, it would become rather meaningless; even worse, it could become a fiscal event in its own right. Watch how the markets would respond to that, rather than a sensible automatic implementation of the automatic stabilisers.

To avoid such difficulties—as the hon. Member for North East Derbyshire said, we have seen this in the past—we can have a balanced budget over the economic cycle. I am long enough in the tooth to remember my friends in the British Labour party changing the start and end dates of the economic cycle to make the numbers fit. It was not very credible, so I would rule that out, however superficially appealing.

All those mechanisms—all of them—depend on accurate forecasts. If there is optimism bias, our fiscal numbers and tax yield will be lower than anticipated on day one. We have seen, year after year, and even with substantial depreciation of sterling, that the contribution of trade to GDP growth was far lower than expected, or even zero or negative.

Secondly, it requires those doing the forecast to have comprehensive access to all of the information. The Office for Budget Responsibility has told us that it did not have access to some Government policy changes before it produced its report in advance of the Budget, and even the most recent Red Books make precisely no consideration of the impact of Brexit on the fiscal numbers —zero—or of the impact of a reduction in immigration, which could have a profound impact on GDP growth and tax yield.

We then have the issue of having to identify in advance—although it is impossible to do so, particularly in the case of certain sorts of external shocks—the precise implications for the fiscal numbers and revenue yield of both cyclical and structural flaws in the economy.

I say to the hon. Member for North East Derbyshire that we all want to see the debt come down, the deficit come down and borrowing come down—all of us want to see that. However, in addition we all want to maintain investment and to ensure that we do not punish those with least, who are dependent on public expenditure.

I also say to the hon. Gentleman, keep pushing. Let us see if we can get an answer from the Minister, and let us see if a flash of inspiration comes over all our heads at some point. If he can identify solutions to those problems—the optimism bias, the lack of information from the forecasters or to the forecasters, and information in advance about the precise impact of both a cyclical and a structural change to the economy—I suspect that I will be the first one to put him up for a Nobel prize for economics. However, in the absence of answers to those questions, I suspect that this issue will remain something that we will have to work at and something that is unlikely to be implemented, or at least implemented quickly.

--- Later in debate ---

[Stewart Hosie]

Is the irony not that that model would look like Greece? It is running a current account surplus, but the pain of a decade of even more brutal austerity than was faced here will be felt for generations to come. That would be success according to the hon. Member for North East Derbyshire (Lee Rowley).

[Peter Dowd]

The hon. Gentleman is spot on. I do not want to misquote the Secretary of State for Transport, but when East Coast went bottoms up he said that that just proved that the market works. That is the sort of economic approach that the Tories take to our country.

Let me go through the three criteria one by one. We are a party that, first, takes seriously the mantle of being guardians of a sustainable economy. We fully costed our election promises in our grey book, “Funding Britain’s Future”. The Conservative party, by contrast, gave no costings whatever in its manifesto. As the shadow Chancellor said, the only numbers in the Conservative party manifesto were the page numbers.

Meanwhile, Carl Emmerson of the Institute for Fiscal Studies said in his election briefing that Labour’s

“forward-looking target for current budget has much to commend it”.

The IFS also estimated that we would have met our deficit target with £21 billion to spare, and that we would meet our debt target.

Secondly, we recognise that Government spending is not something to be scared of, or to have a phobia about, and that some economic metrics do not fully capture the benefits of the gradual build-up of public assets, as the hon. Member for Dundee East mentioned. That is why we distinguish between day-to-day spend and investment in our fiscal credibility rule, because investment is a different kind of Government activity that contributes to a stock of public assets, providing benefits over time. A country is not a house, or an individual who has a lifetime; it goes on, as we know, for a long time. Comparing us to a household might be a soundbite, but it is economic fantasy.

[Peter Dowd]

I am not here to explain what sister parties anywhere do. I could quote sister parties for the Tories all over the place. The hon. Gentleman should be careful what he is wishing for when he starts to make those sorts of comparisons.

The Conservatives have been unable to appreciate this point in their words and in their actions: the Government’s fiscal target of cutting borrowing to less than 2% of GDP by 2021 does not exclude investment, or distinguish between spending and investment. In so doing, the Government overlook, and undervalue, the special character of investment. They do that time after time.

Their austerity programme, the mythical end date of which was in 2018—previously, it was before that—was more a signal of the Government’s failure than of any actual shift in approach. It has done lasting damage to our economy and society, and has left us with rough sleeping up by 169% since 2010, stagnant wage growth—the worst since Napoleonic times—and few examples of public infrastructure being patiently built up and supported.

The third aspect is flexibility when thinking about sound economic policy. The Tories’ austerity programme arises from, as the hon. Member for North East Derbyshire has reaffirmed today, a rigid ideological belief—not always reflected in practice, I have to say—that a smaller state is always better, notwithstanding good evidence of the state’s entrepreneurial capacity and the human costs of austerity. Such rigidity in approach is something that we have avoided in our fiscal credibility rule.

The zero bound knockout that we proposed, which would allow the Bank of England to change course in times of impending crisis when interest rates can do only so much, shows our willingness to adjust economic policy frameworks in the light of circumstances. Any sensible Government would do that—not bind themselves into a failed ideology and process. That knockout is informed by lessons learned after the global financial crisis—lessons that the Conservative party seems incapable of learning—when it became clear that continual cutting of interest rates was having little impact on spending habits and aggregate demand.

More was needed from fiscal policy, and that zero bound knockout—the fourth element of the fiscal credibility rule—acknowledges that that will sometimes be the case. Professor Simon Wren-Lewis writes that if that part of the rule

“had been in operation in 2010, we would have seen further stimulus in this and perhaps subsequent years, leading to a much quicker recovery from the GFC.”

Wren-Lewis describes that part of the rule—the part that allows a reversion to expansionary fiscal policy in times of crisis—as the part that makes the rule

“unique, and brings it up to date with current macroeconomic thinking.”

[Stewart Hosie]

Is it not part of the problem, although we are moving slightly away from a balanced budget, that there has not been a comparable fiscal response to the substantial monetary response that we have seen over the last decade?

[Peter Dowd]

That is a perfectly reasonable comment. Time and again the Conservative Governments whom we have had to endure—I choose to use the word “endure”—over the last nine years have failed to take a wider view on policy-making in the country. Petty in-fighting over Brexit has put us on a precipitous, catastrophic no-deal path. They failed, through austerity, to see, and to care about, how an ideological commitment to cutting apart Government would have ripple effects across the country on rough sleeping, indebtedness, demand and productivity, which is virtually the worst in Europe under this Government.

Our fiscal credibility rule, and economic policy in general, takes a wider view, which is important. We understand how fiscal and monetary policy have to interrelate for the economy to function well in different times, and we understand how principles of economic management such as our fiscal credibility rule have to fit into a broader vision of an economy that serves society, and not just those with the strongest voices.

--- Later in debate ---

[Robert Jenrick]

As we have already heard today, a great deal of progress has been made in that respect. Of course there is more to do, but we have to recognise the considerable progress that we have made. In 2010, as my hon. Friend the Member for North East Derbyshire said, we inherited a very severe situation: debt had nearly doubled in two years and was snowballing, while the deficit soared to a near record level—the highest in 50 years. Of course the financial crisis had contributed to that, but so had poor management of the public finances in the years leading up to it. We have made progress, and we are nearing a turning point in the public finances. Debt has begun its first sustained fall in a generation and the deficit has been reduced by four fifths—from 9.9% of GDP to 2% at the end of 2017-18. That is an important step forward, but there is a great deal more to do.

[Stewart Hosie]

Does the Minister not accept that his party has any responsibility for slowing down the recovery? Does he not recognise that in 2010 the UK was one of only two countries—the other was Argentina—to completely end the fiscal stimulus, weakening the recovery and ensuring that the downturn lasted far longer than it ought to have?

[Robert Jenrick]

No, I do not accept that for one minute. It is exactly as a result of this Government’s fiscal responsibility in that period that the public finances have now improved, credibility has been restored in the market and business has continued to invest. For those reasons and others, we now have continued record levels of employment, record low levels of unemployment and an economy that remains remarkably resilient. Let us not forget that public spending is £200 billion higher today than it was in the last year of the last Labour Government.

We are not complacent about the debt or the deficit. The fiscal outlook may be brighter, but the need for fiscal discipline continues, as my hon. Friend the Member for North East Derbyshire made very clear. The debt is still more than 80% of GDP, which is equivalent to approximately £65,000 per household, and we want to reduce that figure, for a number of reasons. We are concerned to ensure that if there is a future economic shock, the economy is resilient, and we want to improve fiscal sustainability. In the most recent Budget, the Chancellor set aside £15 billion of headroom for economic shock, out of concern for any further uncertainty that might arise as a result of Brexit.

There is a broader point, however: servicing debt is costly. If our spending on debt interest were a Ministry, it would be the third largest, after health and education. Our spending merely on servicing our debt is equivalent to what we spend on the police and the armed forces. As my hon. Friend made clear, that has an opportunity cost, because that spending has no economic or social value and reduces our ability to spend on our priorities and keep personal and corporate taxes as competitive as possible. The debt burden of interest is merely being passed to future generations.

The foundations of the Government’s approach are our fiscal rules: first, to reduce the cyclically adjusted deficit to below 2% by 2020-21, and secondly to have debt fall as a percentage of GDP in the same year. Sticking to those rules will guide the UK towards a balanced budget by the middle of the next decade. The OBR’s economic and fiscal outlook, which was published in October and was quoted from earlier, shows that the Government are forecast to have met both our near-term fiscal targets in 2017-18, three years earlier than predicted. Sensibly, given uncertainties in the fiscal outlook, the Chancellor took the view that we should retain the £15 billion of headroom against the fiscal mandate in the target year and £73 billion against the target of getting debt to fall. The forecast also shows that borrowing will fall to 0.8% of GDP by 2023-24, its lowest level since 2001.