We’re hearing a lot from Labour about economic security, fighting off the party’s reputation for ‘spendonomics’, but is the party being too far too cautious and harming its plans for growth?
Nick Macpherson on this week’s pod suggests maybe it is. The former Treasury boss says the party shouldn’t get “obsessed with fiscal rules”
Don’t get obsessed with fiscal rules, ex-Treasury boss warns Labour
A future Labour Government should borrow to invest and avoid being “too obsessed with fiscal rules”, says the former Treasury boss, Sir Nick, on this week’s The Power Test podcast with Ayesha Hazarika and Sam Freedman.
In a wide-ranging discussion about a future government transition and Labour’s economic plans, Sir Nick said:
Borrowing
“My guess is Labour will, and so they should, borrow a bit more in order to invest. Providing that investment program is focused on what really matters and is then seen through I don't see that as a great problem in terms of the public finances. Indeed, some would argue that that Labour may be being too cautious.”
Reeves’ Mais lecture and growth
“I think a lot of this actually chimes with what most people in the Treasury would be advising. First, a serious focus on – and to be fair. Mr. Hunt is also focused on growth. But I think Rachel Reeves is clearly wanting to embed a framework which will last and is very much talking about a plan which could potentially be played out over a 10-year period.
“This will be music to the Treasury’s ears because in one sense we kind of understand the drivers of growth but the problem in the last few years has just been these extraordinary political changes which just mean that the Government is endlessly relaunching itself and so you never get the focus you need on delivering growth.”
Labour’s fiscal plans
“The case for being tough now is potentially it gives them room for manoeuvre. It gets them credit with the financial markets which, actually, is even more important today than it was in 1997 simply because the national debt is a whole lot higher and the interest rate bill required to service that debt is very high indeed.
“So, I can understand why they're doing what they're doing and I suspect it may already be affecting the markets. Starmer and Reeves in a sense represent stability compared to a political party which, day in day out, someone's either resigning or denouncing the leadership.
“The other thing is, and this may surprise some people, I'm a relative optimist about the economy so I think the Labour inheritance may just be a little bit better than the OBR and others are suggesting. Real wages are rising, interest rates may come down this year which will help people with mortgages and so on, and we just may see more spending in the economy, the economy growing a bit more fast and rather more revenues coming in than expected. If I'm right, and you know I'm not always right, they may actually have rather more room for manoeuvre and so they may be able to stick with the fiscal plan whilst also spending a bit more.
“My guess is also they will have some tax increases up their sleeve of the sort which is consistent with the wider commitments not to raise the main rate, say, of National insurance and income tax.”
The £28 billion and fiscal rules
“Did they have to drop the £28 billion commitment? In the end, £28 billion is not actually very much these days. It's about 1% of GDP. I mean, compared to the sorts of money Nigel Lawson gave away in 1988 this is chicken feed. But I can see in an uncertain world why they just want to be a bit cautious.
“If I was still at the Treasury I'd be trying to get across - because I try to say this to most chancellors - is don't get too obsessed with fiscal rules and the only people in the end who seem to care about fiscal rules are the Treasury. No one else really believes them. What matters is substance. Do you have a plan? Do you have credible projections for spending and taxation which will in the end result in the deficit broadly coming down.
“Those are the things which matter, and no one gives a toss about some weird rule which is about what's going to be happening to debt in five years’ time which you can always revise away each year because the fifth year is always rolling forward. And the rules always end up making you do stupid things. So, my advice to any minister was: ‘Look, focus on the substance, don’t rush into new rules.’ The Tories have changed them every other year and the world never falls in, apart from in the Truss era when they did test fiscal sustainability to destruction.”
Let's Get Fiscal