Rishi Sunak, the new chancellor, is expected to set a revised date for the Budget later this week, most likely with a short delay from the original date of March 11. The big challenge he then faces is how to meet Number 10’s demands to open the spending tap.
His predecessor Sajid Javid’s insistence on sticking to his fiscal rules cost him his job. But economists warn Mr Sunak will find it difficult to rewrite the rules in a way that allows for any significant increase in spending — unless he also ditches the government’s manifesto pledges. Changes to the fiscal framework are under discussion but Mr Sunak is unlikely to make any announcement on this before the Budget itself.
Under Mr Javid’s rules, the government has ample room to spend more on infrastructure without hitting a cap on investment of 3 per cent of gross domestic product. But unless the chancellor raises taxes or makes cuts elsewhere, he has no room to raise day-to-day spending without breaking a pledge to balance the current budget by 2023.
Those constraints — apparent even when the rules were published in November — look even tighter given the Bank of England’s downgrade of the UK’s sustainable rate of economic growth.
Here are some of the options Mr Sunak may be considering to give himself more leeway:
Push back the ‘balanced budget’ deadline
Downing Street has refused to confirm that Mr Sunak will stick to the 2023 target. Government officials said one option would be to set the “balanced budget” target on a rolling five-year basis, pushing back the target initially to 2025. A target range of “plus or minus 1 per cent” could also be introduced, allowing the chancellor more flexibility.
However, while this would allow the chancellor to bring forward some spending to an earlier date, it would not necessarily allow for bigger overall commitments — especially if Mr Sunak wanted to spend money in areas such as nursing or policing, where the costs would be ongoing.
“In a world with hardly any [economic] growth . . . saying they will balance the books in five years rather than three wouldn’t help much,” said Carl Emmerson, deputy director of the Institute for Fiscal Studies, noting it would also raise questions of credibility — “like promising to go to the gym later”.
Jack Leslie, economist at the Resolution Foundation, said that while it might make sense to allow room to under- or overshoot the target by 1 per cent of GDP, this would be purely to allow the government to respond to economic shocks. “It would not be credible to immediately go for the bottom of the range,” he said.
Blur the current and capital spending boundary
Tim Pitt, a former Treasury adviser, said a second option would be to keep the same level of overall borrowing but to “soften the distinction between current and capital spending” in order to spend more in areas such as skills, which are arguably an investment in future generations.
The current rules allow for borrowing of up to 3 per cent of GDP to fund capital investment. Ruth Gregory, at the consultancy Capital Economics, noted that making this an overall cap would be in line with EU countries and would make little difference to the overall fiscal stance.
However, it would be a sharp break with convention: the rules on what constitutes capital and current spending are set by the Office for National Statistics, in line with international practice, and any chancellor who decided to set his own rules would immediately invite accusations of fiddling the books.
Replace framework with a single, looser rule
A simpler option — although one that would invite political attack — would be to scrap the detail of Mr Javid’s rules and keep only a pledge for government debt to fall over the course of the parliament.
Mr Leslie noted that this would, in reality, be a looser commitment than that made by Labour in its election manifesto, since a technical accounting change — owing to the unwinding of a BoE stimulus programme — is set to reduce government debt by about £121bn over the next five years.
“Ultimately, I don’t think any of these wheezes get you out of the hard decision, that you need higher taxes to fund the level of public services people are expecting,” he said.
Be radical and throw caution to the wind
The government is unlikely to scrap the fiscal rules entirely — although many economists might welcome it.
“We’ve gone through 13 fiscal targets in 10 years . . . Not many people think they really are communicating clearly what the government is trying to do,” said Mr Emmerson.
However, Mr Sunak could argue that with interest rates likely to remain low for the foreseeable future, it is time to take a more radical approach, focusing on the UK’s ability to service its debt rather than the size of the deficit or the overall debt stock.
Rupert Harrison, a BlackRock fund manager who advised the former chancellor George Osborne, said on Twitter that looser rules — potentially along these lines — might be justified in a world of persistently low interest rates, but would be “taking developed economies into entirely new territory”.
He added: “Maybe it is time to say, ‘yes, we’re deliberately going to increase debt to GDP’. But that would be a huge departure.”