Osborne’s Fiscal Rule, On Balance, Is Right

“You turn if you want to,” she said icily. “The Lady is not for turning”. I’m old enough – just – to remember hearing a then newish Prime Minister utter these words on News at Ten. What no-one knew at the time, but is obvious now, is that Margaret Thatcher’s speech to the 1980 Conservative Party conference marked the moment the grocer’s daughter from Lincolnshire melted away and the Iron Lady was forged.

The trade unions were militant, unemployment was sharply up and Britain had just suffered its humiliating “winter of discontent”. Thatcher’s response to economic stagnation, ubiquitous strikes and creeping statism wasn’t to buckle like previous Tory prime Minister Ted Heath, mollifying vested interests with ever more government largesse. She set out, instead, to tackle the unions, liberalize the UK economy from its sclerosis and, above all, amidst howls of protest, rein-in public spending.

And so, by not changing her mind, by pressing on and refusing to U-turn despite shrill populist opprobrium and much expert tut-tutting, a provincial grammar school girl launched the Thatcher revolution. In doing so, she not only rescued Britain from its bankrupt 1970s malaise, but inspired countless millions across the world to throw off the debilitating chains of Soviet-style communism.

I recount all this because the UK has just witnessed perhaps the most spectacular political U-turn of recent years. Just a few weeks ago, John McDonnell said the Labour party would back Tory legislation requiring the budget to be balanced by the fiscal year 2019/20. Last week, though, just as it came to the Westminster vote, with a yank on the Parliamentary handbrake and much crunching of rhetorical gears, the same Shadow Chancellor skidded round and sped off in the opposite direction. The contrast with Thatcher could not have been greater.

“We accept we’re going to have to live within our means and we always do – full stop,” declared McDonnell three weeks ago, trying to prove Labour weren’t becoming “deficit deniers”. This was an important statement, ahead of his own party conference, given growing concerns that, under Jeremy Corbyn’s controversial leadership, HM Opposition would play fast-and-loose with the nation’s public finances.

“I believe we need to underline our position as an anti-austerity party by voting against these measures,” McDonnell then declared last week, to general astonishment then political uproar. The Corbynites were accused of losing their nerve and submitting, 1970s-style, to trade union pressure. The most venomous critique came from within McDonnell’s own Parliamentary party, as mainstream Labour MPs, taking to the airwaves and even to shouting expletives in Westminster’s hallowed corridors, rebelled in droves. Had Labour learned nothing from three victories under Tony Blair? Had they learned nothing from May’s general election, when the Tories won a stunning victory, and on a ticket of fiscal probity?

As this political drama unfolded, there were numerous sniffy comments from an array of noted economists. Osborne’s fiscal charter is a mere gimmick, they argued, a device to ensnare his opponents. By declaring his fiscal intentions so boldly, then inviting Labour to agree or not, the Chancellor certainly laid a political elephant trap. Even he, though, can hardly have hoped McDonnell would walk into it quite so gormlessly.

Osborne has also been accused of taking risks. It’s dangerous, say the naysaying dismal scientists, to set strict fiscal rules in today’s uncertain economic climate. The International Monetary Fund expects the global economy to grow by just 3.1pc this year, we recently learnt, the slowest since 2009. With China looking shaky, the eurozone still on the ropes and the UK’s own manufacturing sector possibly in recession, it’s important, the argument goes, that ministers don’t tie their hands by ruling out big fiscal stimulus.

Then there’s the hypocrisy, say the Chancellor’s critics. In early 2010, while in opposition, Osborne mocked Labour’s “vacuous and irrelevant” fiscal responsibility bill. “He is the first Chancellor in our history who feels he needs an act of Parliament on top of a budget statement,” Osborne observed of Alistair Daring. “Either he doesn’t trust himself to secure sound public finances, or he knows the public doesn’t trust him”.

This new fiscal charter is, quite clearly, a political stunt. There is no doubting, also, that families struggling on benefits, for whom the words “budget retrenchment” mean even lower living standards, will look on these Westminster parlour games with disbelief and disgust.

Having said that, I still think Osborne’s legislation, is a good idea – if only to focus political minds. For the UK’s public finances remain woeful. Since 2010, the government has run an annual deficit, on average, of £118bn. So we’re borrowing, each year, around three quarters of the entire welfare budget. Even now, despite years of “austerity”, this year’s excess of government spending over receipts is heading for 6pc of GDP – around the same level as when the UK ended up going “cap-in-hand” to the IMF for a bail-out in 1976. That was the fiscal ignominy, Britain’s economic Suez no less, which ultimately sparked the Thatcher revolution.

The UK government borrowed £12.1bn in August, the latest figures show. That’s £1.4bn more than the same month last year, despite faster UK growth. Is that austerity? Beyond that headline, borrowing between April and July has also been revised £2.2bn higher. To meet the 2015/16 target, spending will now need to be no less than 35pc lower than last year between now and next April – which won’t happen. So, that’s another annual fiscal forecast blown out of the water. No wonder our national debt has rocketed from £727bn in 2009 to a projected £1,532 this year (which, of course, is an under-estimate). No wonder the UK hasn’t run a budget surplus since 2001.

At a time when global bond yields are spiking, and the UK has just chalked up a record external deficit – 5.9pc of GDP in 2014, the highest on record – it is of cardinal importance we demonstrate, finally, the required mettle to control our public finances. The UK’s continued failure to do so represents a far, far bigger risk, in an increasingly febrile world, than legislation that merely increases the government’s political embarrassment if, even by 2020, we still can’t manage even a single annual fiscal surplus. And Osborne’s rule is anyway flexible enough, applying only “in normal times”, and ceasing to bind if the economy consistently grows by less than 1pc.

The discussion that the government should “borrow to invest” in infrastructure is worth having. But I still don’t buy it. For one thing, the distinction between capital and current spending will be fudged – with public sector wages being redefined as “training” and then as “investment”. It always is. And why should civil servants be trusted to identify and manage infrastructure projects efficiently, when experience so clearly suggests otherwise.

We need to direct into infrastructure spending, instead, the vast pool of long-term UK private sector money, not least pension and insurance funds, looking for a decent yield. That could happen, as it has in the past, as long as politicians learn to judge and approve such projects in a timely and rational manner. Perhaps the new Infrastructure Commission, under the talented Lord Adonis, will finally achieve this.

This weekend, the Chancellor will no doubt feel pleased with himself. Corbyn has endured his first Parliamentary rebellion – to be followed, no doubt, by more. But political significance, and greatness, isn’t about toying with Parliamentary minions, landing blows on hapless shadow chancellors. Political greatness is about facing down vested interests, doing what is really necessary and having your conference speeches quoted 35 years hence.


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