Both main parties must commit to the spirit of their targets not just the letterby Gemma Tetlow / November 18, 2019 / Leave a comment
Whatever the result on 12th December, the next government will adhere to a very different set of fiscal rules from the ones that have applied since 2015. Since the Conservatives won a majority in the election that year, the government has been committed—in theory at least—to eliminating borrowing altogether. But that pledge will be ditched after the forthcoming election—whoever wins—and replaced by rules that will allow more borrowing for investment, particularly when interest rates are low. On the whole, this could make for a positive change but will not eliminate all the problems and scope for gaming that accompanied previous fiscal rules.
Both the Conservatives and Labour have pledged to ensure that tax revenues match day-to-day public spending but have signalled they want more scope for borrowing to invest. Labour’s commitment to balance the current budget in five years’ time is the same pledge the party made at the last election. But the Conservatives’ proposed rule—ditching their commitment to eliminating borrowing and instead promising to balance the current budget in three years’ time—is new. Since government policy has never actually been consistent with eliminating borrowing, the Conservatives’ rule change is a welcome realignment of the formal targets with the reality of policy.
The decision by both parties to allow greater scope for borrowing to invest is in line with growing agreement among academic economists that governments should take advantage of currently low interest rates to invest in infrastructure to help boost economic growth. Both main parties have said that the amount the government will be able to borrow will explicitly depend on debt financing costs—the first time such a rule will have been built into the UK’s fiscal architecture.
Another new aspect of the rules set out by the Labour Party is a focus on measuring and increasing public sector net worth, rather than merely worrying about the level of public sector net debt. The latter has been targeted by UK governments since 1997 and chancellor Sajid Javid has continued to focus on the importance of this measure. But the headline measure of net debt suffers from several shortcomings that have allowed previous governments to game their debt targets.
The last Labour government’s commitment to keeping net debt below 40 per cent of national income encouraged Gordon Brown…