Early on in his dismal Financial Statement Rishi Sunak said:
“At a time when the OBR has said that our fiscal headroom could be “wiped out by relatively small changes to the economic outlook,” it is right that the central fiscal judgement I am making today is to meet our fiscal rules with a margin of safety. The OBR has not accounted for the full impacts of the war in Ukraine, and we should be prepared for the economy and public finances to worsen, potentially significantly.”
[OBR: Office for Budget Responsibility.] Because of the current high rate of inflation the government will be receiving more in taxes than was previously expected. This unexpected extra revenue could, within Sunak’s economic framework, allow the government to engage in some extra spending without increasing the fiscal deficit. When Sunak refers to ‘fiscal headroom’, he is referring to this small windfall in tax receipts. Sunak could use it to subsidise energy costs. But Sunak has decided not to spend the windfall so that the government will be in a good financial position to deal with the next crisis.
There are two problems with Sunak’s ‘central fiscal judgement’. Firstly, it is completely false to state that the ‘public finances could worsen, potentially significantly’. The UK is a currency issuing state. It is not financially constrained. The pandemic proved this. During the pandemic Sunak made some £400 billion in furlough payments. He instructed the BoE, via supply orders in parliament, to mark up the bank accounts of all those entitled to payment – close to 20% of the workforce. The Debt Management Office (DMO), as a matter of course, issued government bonds equal to the difference between government spending and tax receipts. Most of these bonds were bought by the BoE which simply expanded its balance sheet by creating the money that the government needed to pay for furlough.
If there was another pandemic in 2023, the government could do exactly the same. The fact that it has increased national debt by £400 billion in 2020-2-22 in no way limits its ability to increase it in the future. A currency creating state is not financially constrained. It is resource constrained. Despite having limitless money Sunak could not, at the start of the pandemic, get his hands on Personal Protective Equipment since our own capacity to manufacture it was no longer available.
The second problem with Sunak’s claim that the government is financially constrained is that the Labour Party shares that belief. In her September 2021 conference speech some 6 months ago Shadow Chancellor Rachel Reeves stated
“Labour won’t be making promises we can’t keep or commitments we can’t pay for. That is why we would put in place fiscal rules that will bind the next Labour government to ensure we always spend wisely and keep debt under control, so that we have the means to transform schools, hospitals and communities, and pay for investment in the new industries and jobs that our country desperately needs.”
However, in her response to Sunak’s Financial Statement, Reeves took the decision to present a more nuanced expression of that view in the context of the need to support public services:
“Growth is essential for funding our public services, keeping taxes under control and keeping a handle on public finances too. That is why Labour has announced a tough set of fiscal rules to get our debt and our deficit down. The truth is that, because of the Government’s failure to get the economy growing, the Chancellor has had to put up taxes on families and businesses a staggering 15 times.”
While continuing to pay lip service to her irrelevant fiscal rules, Reeves has realised it is more politically sensible today to concentrate on the significant drop in peoples living standards caused by the current inflation. Reeves has proposed that the government subsidises energy costs by a windfall tax on energy companies. Which is fair enough. The huge increase in profits being earned by the oil companies has nothing to do with their business acumen and is entirely due to the hostilities in Ukraine and the monopoly powers of OPEC. But Reeves’s suggestion that Labour will avoid fiscal deficit problems by increasing economic growth, so that the funds to finance its support for public services will come from the increased taxes that will flow from that economic growth, is disingenuous at best and will lock Labour into the same economic framework as Sunak. If the growth does not happen, the poor will suffer what they must.
Sunak’s Financial Statement was an announcement of austerity for the poorest members of society – those dependent on universal credit and state pensions. Sunak claims that it is necessary that their standard of living drop so that the state is better placed to fight the next crisis.
Reeves should have directly challenged Sunak’s statement that austerity was necessary to ensure that the government was in a strong position to meet any future crisis. She should have pointed out that a currency creating government is not financially constrained and will always be able to spend whatever it thinks it is worth spending. Despite her protestations that she would have protected the poorest in society, since she is locked into the same false economic framework as Sunak, there is every reason to be sceptical that she would have behaved differently to Sunak had she been in power.
Sunak’s statement was greeted, fairly universally, as the dismal statement that it was. Perhaps Johnson will use that fact to finally get rid of his chancellor who is determined to oppose his levelling up agenda without which he will lose his majority in Parliament in 2024. He would be wise to do so as Sunak evidently fancies himself as Johnson’s successor. By pleasing the strong Thatcherite element in the Tory membership and thus pleasing Thatcherite backbenchers he is positioning himself in any future leadership contest. Johnson needs to scupper his ambitions quickly, before his own programme is completely in tatters.