Martin Seale

Jeremy Hunt’s November Autumn Statement was a clever piece of work.  It had two objectives.  Firstly, to win the next general election. Secondly, if the Tory Party did not win the next general election, to guarantee that any Labour administration would fail.  Hunt’s trump card in achieving this dual objective is the fiscal rule book. 

Hunt, in November 2022, announced his fiscal rules: “…I also confirm two new fiscal rules. The first is that underlying debt must fall as a percentage of GDP by the fifth year of a rolling five-year period. The second is that public sector borrowing over the same period must be below 3% of GDP.”  (Hunt, Autumn Statement 2022)

The fundamental premiss of these fiscal rules is that national debt is a bad thing and must be reduced.  (National debt is the cumulative amount of money since the late 17^th century that the government has spent into the economy less what it has taxed out of the economy.)  

This suits the Tories very well since the Tories want to reduce the state’s involvement in the economy.  They have been successfully doing this over the last 45 years since Thatcher came to power.  Energy, housing, water, transport, once areas of huge state involvement, have been steadily farmed out to the private sector.  Increasingly, health is going the same way.  Devising a fiscal rule that limits state expenditure fits perfectly with the political objective of a state disengaged from the economy.

Hunt used these fiscal rules in 2022 to justify massive deficit-reducing tax increases.  Some, like the increase in corporation tax rate to 25%, were direct.  Others, like the freezing of income tax allowances, were by stealth.  The total effect is expected to be over £40 billion per year in additional tax revenues. 

A year later, in November 2023, Hunt found that he had a tax bonanza.  This gave him 3 options.  1) Use the tax bonanza to lower the deficit and thereby lower any increase in national debt, 2) increase state spending or 3) reduce taxation.  Hunt discovered that despite reducing taxes and thus increasing the deficit, he could still meet his fiscal rules.  Unsurprisingly, in an election year, he opted to cut taxes.  The tax-cutting Tory party was reborn with a vengeance.  Expect some further tax reductions in the March 2024 budget.

By not increasing state spending to match inflation, the real value of state spending and therefore of public service provision over the next 5 years is expected to drop dramatically.  From Hunt’s perspective that will be Labour’s problem if, as seems likely, they win the next general election.

Labour’s shadow chancellor, Rachel Reeves, has announced her own fiscal rules.  Her proposed rules require that debt as a percentage of GDP must fall over a parliamentary term.  Now, if GDP growth is low or poor, a reduction in the debt ratio may well require that the fiscal deficit  be reduced by cutting spending or increasing taxes.

But Reeves has also committed Labour to not increasing taxes.  Her rules, therefore, may imply a cut in government spending if GDP growth is low.  Reeves, of course, maintains that growth will be high and so Labour will be able to increase government spending while not raising taxes.  

We suspect growth will be low and a Starmer administration will very quickly have to cut government spending if Reeves is to meet her self-imposed fiscal rules.  Cutting government spending and therefore public services will likely make the first Starmer administration the only Starmer administration.

Spending and taxing decisions should be based solely on the effect they have on society.  If government spending has a good effect on society, as during the pandemic, when the difference between spending and taxation increased by some £400 billion, then it should happen.  There should be no concern with the effect such spending has on the national debt.  If, at some point in the future, it makes sense to increase taxation or reduce spending then the national debt may fall.  However, the size of the national debt should never be a consideration in any spending or taxing decisions.  Only their effect on the society should be considered.

The Tories know that a preoccupation with the size of the national debt will doom any future Labour administration to failure.  That’s why they so assiduously fixate the society on the concept of fiscal rules which are guaranteed to favour a reduction in the size of the state.  Will Labour dare challenge the concept of fiscal rules once they attain power?   If Reeves does not find some way to ditch her pre-occupation with low taxes and low national debt and to reclaim the state as the main guarantor of social infrastructure, Starmer’s administration will be short lived.