David Blunkett, University of Sheffield
Much has been said about UK chancellor Rachel Reeves’ self-imposed fiscal rules, and her repeated assertion – which she included in the spring statement – that they are “non-negotiable”. Of course, this is true if you’re not prepared to listen to alternatives, but in the real world there is no set economic template with which people cannot argue.
Put simply, the chancellor’s rules demand that day-to-day expenditure should be covered by government income at the end of the five-year economic cycle. This is what has led to the current need to cut spending – including to health and disability benefits – so drastically. The length of this cycle is determined by the government as part of their “rule”.
All of this is predicated on the government’s belief that economic policy will be undermined if the international financial markets (including the bond markets on which governments depend for borrowing) react badly. Which, it is commonly asserted, would significantly push up the cost of borrowing. Other factors, such as US president Donald Trump’s extraordinary threats to trade, and the borrowing requirements of other countries, will also have an immediate impact.
Underpinning all of this is the split between capital investment – spending on things like roads and hospitals – and day-to-day revenue to keep services operating.
Therefore, the chancellor imposes rules to avoid the financial markets hitting the UK in the way they did when former prime minister Liz Truss and her chancellor Kwasi Kwarteng introduced a “mini budget”. The unfunded tax cuts it contained led to the markets losing confidence in the UK’s financial stability.
This is the spectre at the feast. Everything being done by the present government is with the backcloth of what happened in 2022. We are, in effect, binding ourselves to a moment in time.
Many economists disagree with the rigidity (or what is known as “Treasury orthodoxy”) about how the economy works. Leading international economist Mariana Mazzucato, along with a group of other renowned academics, published a letter in the Financial Times spelling out their concerns about the imposition of the “rules”.
In practice, while public spending over the next two years will not be hit drastically (other than the welfare budget), the following three years will see a massive tightening of what is available for most public services. This includes local government and the criminal justice system – which have seen eye-watering cuts in previous years.
The average 1.2% increase in departmental budgets projected over the three years from 2027 is far less than this for many government departments and for local government. This is because spending in areas such as health and for schools (but not education more broadly) is predicated to rise much more substantially.
This is why people are starting to use the word “austerity” – they are seeing a reflection of the years between 2010-2017, when many felt that public services were decimated.
Scorecard for government spending plans
During that austerity period, the body known as the Office for Budget Responsibility (OBR) was brought in by the then-chancellor George Osborne. Now being carried through even more rigidly by Reeves, this is intended to be an independent group which “scores” the government’s likely success against its predictions. I use the word “likely”, because just three members are charged with the analysis, by the Treasury, of how successful the policy is likely to be.
The OBR has come to have massive influence over what the government believes it can undertake, confining the options even beyond the self-imposed rules.
Just before her spring statement, the chancellor altered the amount that would have to be saved from changes in the welfare system. This was in order to take account of the analysis by these three individuals who believed that the reforms as proposed would not achieve the savings required.
So, we go round in a circle – with one set of economists double-checking the calculations and projected analysis of another set of economists. But they have such enormous influence that they can change government policy.
You might believe that the OBR (being full of experts) is pretty much infallible. You would be wrong. Since its inception, it has often been wide of the mark. Even when only marginally, this has had an impact on both policy and perceptions, including by those financial markets that have such a stranglehold on nation states.
In 2012, the OBR projected that over the five years ahead, growth would average 2.8%. In fact, it was 1.7%. In 2020, their prediction was that gross domestic product (GDP) would fall by 11.3% when in fact the drop was 9.8%. Most recently, in 2023, it projected a fall in GDP of 0.3% – which sadly turned out to be 0.8%.
I use these stats merely to illustrate that forecasts and scorecards as to whether the government has got its sums wrong are highly subjective. For politicians to place their economic and political policies in the hands of a group of disparate individuals with their own political and economic outlook and personal experiences is, in my view, bizarre.
This is why some of us who know about the difficulties of government from having been there, and who are not in any way dismissive of the huge power of the international markets, are challenging this economic orthodoxy.
We are simply asking whether rigid economic respectability is truly more important than long-term investment and sustaining essential public services.
David Blunkett, Chair in Politics in Practice, Department of Politics and International Relations, University of Sheffield
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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