The latest occupant of No 11 will have to loosen the fiscal rules to borrow moreby Paul Wallace / September 30, 2019 / Leave a comment
Sajid Javid’s speech to the Conservative Party conference this afternoon was more notable for what he did not say than what he did say, other than the crowd-pleasing plan to push up the national living wage. The chancellor’s upbeat message reflected the theme of an electioneering conference: let’s get Brexit done and spend lots more. Nowhere was there a recognition that spending more by borrowing more will mean breaking the government’s fiscal rules, even if a disastrous no-deal departure from the EU can be avoided.
Javid promised lots of investment to upgrade Britain’s shabby infrastructure. In fact, much of this had already been earmarked by his predecessor. Philip Hammond announced in his budget last October the “biggest ever strategic roads investment package,” committing to spend £25.3bn on this strategy between 2020 and 2025.
But whether the pledges are new or old, Javid is clearly under immense pressure to find the money for Boris Johnson’s reinvention of the Conservative Party as a big spender. Since the prime minister is also keen on lower taxes that must mean higher borrowing. The chancellor appears trapped, since beyond a certain limit that will breach the fiscal rules.
At present the government has an objective to balance the budget by the mid-2020s. More immediately and relevantly its main rule is that borrowing (adjusted for the economic cycle) should be below 2 per cent of GDP in 2020-21, the financial year starting next April, together with a supplementary aim for net debt to be falling as a share of GDP in that year. There is also a more distant target for a cap on welfare spending.
In March the independent Office for Budget Responsibility forecast that the government was on track to pass its main rule with a comfortable margin. That “headroom” for extra borrowing in 2020-21 amounted to £26.6bn. However, the OBR warned that changes in the way in which student loans are treated in the public finances would reduce the margin to £15bn.
On the face of it, Javid’s spending statement earlier this month managed to remain within that limit since he raised expenditure in the next financial year by £13.4bn above previous plans. Even so, his readiness to splash out on the basis of an obviously out-of-date forecast was hardly the act of…