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More borrowing, lower taxes? A plan for Rishi Sunak at the Treasury

The Economist

As the new Chief Secretary to the Treasury (CST), Rishi Sunak has one of the toughest jobs in government. The CST’s main responsibility is the control of public expenditure – even more challenging than usual given the political pressure to open the spending taps. It is also one of the nerdiest areas, full of technical jargon and requiring a mastery of detail. Here are a few words of advice.

The two priorities will be deciding how to manage the next Spending Review, which is already behind schedule, and what to do about the ‘fiscal rules’, the overarching targets for government borrowing and debt. The latter should be relatively straightforward.

The UK’s experience with fiscal rules has not been great. The IFS has noted that 10 of the 12 fiscal rules adopted between 1997 and 2016 were subsequently missed or abandoned. However, the current set of rules are at least on track to be met. If it ain’t broke, don’t fix it.

The government’s ‘fiscal objective’ is to balance the budget by 2025-26. The OBR doesn’t guess that far ahead, but its March 2019 forecasts had public sector borrowing on a steady downward path and falling to just 0.5% of GDP in 2023-24.

The more immediate target is the ‘fiscal mandate’, which is that the structural deficit (the actual deficit adjusted for the economic cycle) should be below 2% of GDP in 2020-21. Again, based on the March forecasts, this target will be hit with £26.6 billion of ‘fiscal headroom’ to spare. Last, there is a ‘supplementary target’ to reduce public sector net debt as a share of GDP in 2020-21, which should also be achieved.

My instinct would be to keep all these targets, perhaps with one exception. The objective of budget balance in 2025-26 makes the least economic sense, partly because how it turns out  will depend on where we happen to be in the cycle at the time. This objective might also clash with the less ambitious fiscal mandate for the structural deficit, if this is extended.

There might be a case for sticking with the aim of balancing the budget as a signal of commitment to fiscal discipline, especially as 2025-26 is still some way off. However, this deadline has already been pushed back at least once, and may no longer be credible anyway given the new spending pledges.

The fiscal mandate has a stronger intellectual foundation (see, for example. this paper by Simon Wren-Lewis and Jonathan Portes). The limit for the structural deficit could simply be rolled over for a year or two, until 2022-23. Bearing in mind that the next election is due by May 2022, this would cover the remainder of the current government’s potential term in office.

This would allow for more borrowing than currently planned, not just in 2020-21, but in the later years too. Fiscal hawks will justifiably be concerned by this, especially given the long-term demographic pressures on the public finances. Nonetheless, average annual deficits of less than 2 per cent of GDP over the cycle should be small enough to keep debt on a gradual downward path as a share of national income.

A little more borrowing would also be preferable to the likely alternative of further increases in the tax burden, which would otherwise have to take up the slack. At the very least, the Treasury should avoid adding new taxes, including the flawed Digital Services Tax, and focus instead on rolling back others with similarly flimsy justifications, such as the punitive taxes on sugar.

My relatively sanguine view depends, however, on the government resisting the temptation to go on a wild spending spree. Here the Spending Review is crucial. This is expected to confirm the departmental expenditure limits (DELs) for 2020-21 and the two years thereafter (again taking us to 2022-23). However, the review should already have been launched before the summer recess.

The previous Chancellor, Phillip Hammond, took the view that it would be ‘unwise’ to make a three-year settlement before details of the UK’s exit from the EU were agreed, and hinted that the start of the Spending Review could be delayed until next year. He has also been keen to argue that the £26.6 billion ‘fiscal headroom’ would not be available for other priorities in the event of ‘no deal’.

There is more than a whiff of ‘Project Fear’ in all this. Indeed, it is reminiscent of George Osborne’s threat of a ‘punishment Budget’ ahead of the 2016 referendum.






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