Charter for Budget Responsibility — House of Commons, 2017-01-24
Topic: Macroeconomics
John Martin McDonnell (Labour, Centre-left): That is clearly not the case. If the Chancellor had looked carefully at Labour’s fiscal credibility rule—[Interruption]—and, indeed, adopted it, he would have seen that what we would actually be doing is reducing debt in the lifetime of a Parliament as a result of ensuring that we invest properly in tackling the productivity gap, in bringing people back to work and in ensuring that they have the highest skills. Those skills will produce the high wages that will make it possible to fund the economy through a tax regime that is fairer than the existing one It simply will not be possible to deliver the scale of support and investment that is needed to rebuild our economy within the strictures of the rules that the Chancellor is proposing. We will get half-measures and rhetorical commitments. What we will not get is a serious commitment to delivering the economic transformation that we now need, because that would require the Government to take on a few too many vested interests. Such a commitment would involve a serious attempt to clamp down on tax avoidance, reversing handouts to giant corporations and the super-rich, and ending—in reality, not just in rhetoric—the colossal imbalance in investment between a few favoured places in the south-east and the rest of the country In changing the rule, the Government are admitting their prior failure, but then failing to address its causes seriously. Investment is too low, productivity is too low and wages are too low. Labour’s own fiscal credibility rule follows the recommendations of world-leading economists, business organisations and trade unions by keeping day-to-day spending entirely separate from the Government’s plans to invest. In contrast, this Government’s fiscal rule is excessively tight on Government investment at the same time as being excessively loose on Government control The primary reason for introducing a rule is to show that a Government’s fiscal plans are consistent and planned well in advance. That allows businesses and investors themselves to plan, and reassures markets that a Government will not attempt to spend excessively. An ideal rule should be the basis of the strict enforcement of borrowing limits—we accept that—but it should also contain the flexibility for Governments to respond when unexpected shocks occur. Getting the balance between these two points is difficult so, following the best available economic advice, Labour’s fiscal credibility rule places the power to determine when we are outside normal times in the hands of the Monetary Policy Committee, which can declare under the terms of the fiscal rule that it is necessary for fiscal policy to adjust in response to an unanticipated shock. The freedom to determine the fiscal stance is a significant power for a Government, so it has to be used responsibly Labour does not believe that it is desirable to return to the days when Governments would produce their own economic forecasts and then decide on their own terms where the business cycle was and how much extra fiscal leeway they were allowed. That meant that the Treasury had excessive power to determine fiscal policy, and that in turn meant Governments would have the power to favour short-term quick fixes at the expense of longer-term action to rebuild the economy. A credible fiscal rule should not allow that to happen. It should be bolted into place, compelling a Government to act for the longer-term good Labour’s fiscal rule does that by handing power to recognise economic shocks over to the MPC, yet the new charter for budget responsibility appears to hand the power to recognise economic shocks straight back to the Treasury. It returns us to the bad old days when short-term Treasury thinking would be allowed to dominate economic policy making. It could mean that once again Conservative Chancellors would be tempted to ease off on or tighten up their spending not because of the economy, but because an election is due. In other words, it largely defeats the purpose of having a fiscal rule in the first place. Instead of breaking with the short-term thinking of the past, it bolts it more firmly into place. How can the rule be taken seriously when it is so obviously open to being undermined? In other words, the revised charter leads us dangerously close to the worst of both worlds. It is excessively tight on Government investment when building a post-Brexit economy should demand Government intervention, yet it is excessively loose on the Government themselves, handing too much power back to the Treasury The Chancellor and the Government are squandering an opportunity here. They could have ditched the failed existing fiscal rule and put in place a new fiscal mandate that would grant the space needed to rebuild and transform our economy as we prepare for Brexit. Instead, they have handed more powers back to the Treasury while the Chancellor has insisted on maintaining austerity spending cuts. No part of the Government’s new fiscal rule can be supported and we will be voting against the charter as a whole.