Charter for Budget Responsibility — House of Commons, 2016-07-20
Topic: Macroeconomics
Stewart Hosie (Scottish National Party, Centre-left): I am glad that the Minister mentioned short-term turbulence as a result of the Brexit decision—the Chancellor has already spoken about that. The Minister is a pragmatic politician, so if that short-term turbulence turns into medium or long-term problems in two, five or 10 years—not least because of the absence of trade deals with the world’s biggest trading bloc—I hope that he will turn on the pragmatic tap even more strongly than he has perhaps tried to do in the Treasury so far This debate is about the fiscal charter, so I will run through a small bit of history and make some other comments. When the coalition Government first introduced the charter for budget responsibility, the fiscal mandate was for a cyclically adjusted current budget to be balanced by the fifth year of a forward-looking forecast period—that was similar to the plan laid out by the Labour shadow Chancellor earlier. As the Library has helpfully pointed out—it has helped a great deal with this debate—that plan was shortened to the third year of the forecast period in the December 2014 charter update. That also focused on the current balance, which is the difference between Government revenue and current, rather than capital, expenditure. Focusing on the current Budget was designed, at least on paper, to protect public sector capital investment, which is important A number of speakers have mentioned capital investment today, but the real problem is that capital expenditure forecasts, and real capital investment, have been rising and falling over the past few years like a yo-yo. There is concern that the National Infrastructure Commission was designed not so much to facilitate investment and drive it on, but rather to delay some of it further—but I digress The previous mandate used a measure of the budget balance adjusted for the economic cycle to allow the flexibility to run a deficit during recessions and a surplus during booms. The fiscal mandate was accompanied by a supplementary debt target. Originally that was for public sector net debt to fall as a share of GDP in 2015-16, but that was moved to 2016-17 in the December 2014 update. That target, of course, was not met—one of a number of broken promises by the Government in the previous Parliament, in which debt, deficit and borrowing targets all failed to be delivered as promised in 2010 That brings us to the current charter for budget responsibility and the fiscal mandate. The charter sets out the OBR’s role, how it performs its duties, and the required content of its publications. It lays out the Government’s fiscal mandate, supplementary debt target, and essentially the cap on welfare spending. The OBR assesses and reports on progress against those targets in the economic and fiscal outlook. Just in case anyone has forgotten, the current fiscal mandate target is for the public sector’s overall budget—public sector net borrowing—to be in surplus by 2019-20. Once a surplus has been reached, the target is for a surplus to be achieved every year. Frankly, that is impossible if we are to manage the economy in a sensible way. The other target is the supplementary debt target, where until 2019-20 the fiscal mandate will be supplemented with a target for public sector net debt to fall as a percentage of GDP in each year. Those targets, as the Chief Secretary said, will apply unless the OBR assesses there has been a significant negative shock. That is, in effect, where we are today If annual real growth in the economy is less than 1%, the OBR will judge there to have been a significant economic or negative shock and the economy will be out of what it calls "normal times". If the OBR judges that a negative shock has occurred or will occur, fiscal targets will be suspended. That is the nub of the problem with these rules. If the OBR looks backwards over a 12-month period before confirming that growth was less than 1%, that might mean that changes to monetary or fiscal policy may not be delivered or enacted as quickly as they should have been to minimise the problems of a slowing economy. Likewise, if the future forecasts are overly optimistic—quite a common phenomenon in this place—necessary changes to fiscal or monetary policy required to protect jobs and growth might be delayed longer than they should be. In essence, the charter and the rules are a policy for inertia, rather than a policy for action Part of the charter requirements are that, should the rules be suspended, the Treasury must set out a plan to return the budget to surplus, including temporary fiscal targets. That plan must be approved by a vote in the House of Commons. One of the last acts of the previous Chancellor was to appear to suggest a suspension of the rules. I think he said—the Chief Secretary can correct me if I am paraphrasing this incorrectly—that the automatic stabilisers would be allowed to function and that corporation tax would be subject, potentially, to deep cuts. If that was the plan, it was not very detailed. I have not yet heard of any temporary targets and Parliament has not yet voted. We are about to go into recess and there is no vote on the horizon. I think that that tells us all that the charter is not fit for purpose and that the rules in place for when promised targets fail are not even remotely being adhered to. It would be better, I think, not simply to suspend the charter, but to rip it up and start again. I am rather less concerned with a plan and a charter to deliver an arbitrary surplus. More important is a plan to deliver real economic growth It is worth pointing out that over the past six decades or more, budget deficits have been the norm. Surpluses have been very rare. Since 1955-56, the UK’s public sector budget has been in surplus for only eight years. The last surplus was 15 years ago. The OBR suggested that the UK was set to return to surplus by the end of the decade, but that now looks unachievable—another broken promise. There is, however, a bigger problem than a surplus rule, which the OBR described, in civil service code, as "ambitious relative to the fiscal performance of past governments" I will translate that, Mr Deputy Speaker: it means the Government will not meet their targets. The bigger problem is that it is designed to suck consumption out of the economy before recovery is secured. The scale of that, even as recently as the 2016 Red Book, is breathtaking: not just cutting £10 billion a year more than is necessary to run a balanced economy, but by 2020-21 cutting spending by £50 billion a year more than is necessary to run a balanced current budget We know where the cost of this austerity falls: it falls on the poorest in society. How do we know that? The Government have told us. As the cuts and tax rises have risen, so has the ratio of cuts to tax rises, placing the burden of austerity and an arbitrary fiscal target squarely on the backs of the poorest This mandate is now collapsing around the Government’s feet, along with the much-vaunted and never-delivered long-term economic plan—a plan that is a bit like a unicorn: everybody knows what it looks like but no one has ever actually seen it. [Laughter.] I used that in a previous speech, but I did not get a laugh that time. It has been said that fiscal rules can be applied in other ways, but the previous Chancellor and, I presume, the current one believe that the current level of public sector debt is too high and that running a budget surplus is the only reliable way to reduce it The Treasury Bench has argued that high levels of debt are too risky and too damaging for the UK, leave the UK vulnerable to future economic shocks and squeeze out other public spending through high debt interest payments. At face value that is fine, but there are other credible and fiscally responsible ways in which the deficit can come down and debt can fall as a share of GDP.