The Chancellor is learning that the golden rule of fiscal discipline is to keep moving the goalposts
Rules are made to be broken, or so every teenage rebel declares when preparing a minor act of deviancy, smoking in the playground or playing with their smartphone in class. Sajid Javid, the Chancellor of the Exchequer, insists he will not break the fiscal rules governing how much he can borrow in 2020-21, promising to spend more but not to “let our public finances get out of control”.
Unfortunately he already appears to be picking and choosing which of the fiscal rules he wants to follow.
There are four “rules”, set out by Philip Hammond as updated versions of those established by George Osborne under the coalition Government. These pledge to keep the structural deficit below 2pc of GDP in 2020-21, the national debt falling as a share of GDP that year, and for welfare spending to stay below a set cash limit in 2022-23.
As of March, the Office for Budget Responsibility believed the Government was on track to meet all of those, giving the Chancellor some leeway to borrow and spend as much as £28bn while still keeping on the right side of the self-imposed rules.
However, there is also a fourth, and rather less forgiving, rule: the fiscal objective. This says the Government is aiming for a balanced budget by the middle of the 2020s.
The OBR warned the Treasury is on track to miss this. Some 15 years after Osborne was first installed in Number 11, the finances will still be in the red.
Javid’s latest promise seems only to relate to the one-year “spending round” covering the 2020-21 financial year, which is due on Sept 4, so he can promise to match those targets without referring to the key goal of getting back into the black.
But careful wordplay around the timings indicates that the crucial goal of balancing the books is never going to be hit. The deficit is here to stay, with debts mounting up as far as the eye can see.
How much money does the Chancellor have to turn to?
In March, at the time of the most recent Spring Statement, the OBR estimated the 2020-21 structural deficit would be 0.8pc of GDP. “Structural” refers to efforts to strip out the ups and downs of the economic cycle, so it is not precisely the amount of money that will be borrowed that year, but it is the measure the fiscal goals target.
It indicates that up to another 1.2pc of GDP can be borrowed, amounting to somewhere in the region of £27bn.
Things are not that simple, however. Firstly, the public finances have deteriorated since March. The deficit was already forecast to rise this financial year, and a weaker economy has set the Chancellor on track to overshoot even that rising number by £8.5bn of extra borrowing, according to estimates from the EY Item Club.
“Given that current public sector net borrowing is already 60pc higher in the fiscal year to date compared with the same period in 2018, further space for budgetary manoeuvre within existing fiscal rules seems to be becoming more limited,” says economist Giada Giani at Citi. “Deterioration to date could see the OBR significantly downgrade the 1.3pc of GDP Brexit fiscal reserve ahead of the next Budget.”
On top of that a change to the way student loans are counted, to reflect the proportion that are never repaid, will add around another £11bn to the deficit. That will leave the Chancellor with up to £8bn spare.
The Government has already committed to hiring 20,000 more police officers, spending an extra £1.8bn on hospitals, and beefing up the border force, meaning that the headroom to do anything more becomes limited.
Add in potential tax cuts, from a £1.5bn fall in fuel duty to hiking the threshold for higher rate of income tax, and little will be left over.
That is before any post-brexit spending to get the economy through any disruption after Oct 31.
One potential way to balance these competing demands is to squeeze the areas that are not priorities. Policing, education and health are in line for more money, so other departments may have a tougher time in the spending round.
Can Javid change the rules?
In theory, yes. The rules were made by a previous Chancellor in what feels like a different political and economic era.
On the other hand, Javid’s pledge to meet the targets indicates he means the current set.
There is room for some revision of the way the rules work, however.
An obvious way to “find” another £10bn or more would be to ignore the student loans issue.
The reclassification of student debt is required because only around 30pc of the 2017-18 graduates in England are expected to repay their loans in full, for instance.
The Government will in effect write off those debts and pay the bill itself.
This does not reflect any underlying change in the public finances, merely a recognition of reality. As a result it could be argued that the fiscal rules can be adapted to absorb this borrowing without affecting other areas of taxation and spending. This is not unprecedented. Indeed, much bigger games have been played with financial targets in the past.
Osborne’s rules included a rolling five-year target, meaning he could always set out plans to meet his goal, changing them to run higher levels of borrowing each year safe in the knowledge that the deadline would always remain five years away.
Gordon Brown ran the Treasury with a ‘“golden rule” on borrowing over the economic cycle.
It was far from watertight, though – if he wanted to borrow more he could simply redefine the parameters of the cycle, moving the goalposts while staying within the letter of the rule.
In the short term, the outcome is only very limited extra spending, far from the boost that has been hyped up so far.
Or there could be a total break with the fiscal rules and a new era of enthusiastic spending.
None of this will put the Chancellor on track to balance the books in 2025.
“Even before the new Johnson-led government came into being, it looked highly questionable that a balanced budget would be achieved by the mid-2020s – I doubt many people genuinely thought it would,” says Howard Archer at the EY Item Club. “Of course, given the plan to lift spending and the tax pledges made by Johnson during his leadership campaign, it looks even more like pie in the sky.
“It could well be that Javid will decide to set out new fiscal rules in the Budget that move the goalposts and give greater scope for tax cuts and future spending plans.”
September’s review will stick tightly to 2020-21 and to departmental spending only, so Javid can avoid mentioning this inconvenient fiscal objective if he so wishes.
Indeed, this would appear to be his goal: “Next week’s Spending Round will be about clearing the decks to allow us to focus on Brexit,” the Chancellor said.
“It would be a distraction to start debating every line of Government funding.”
That looming deadline cannot be averted forever.
At some point, ministers will have to acknowledge that deficits are here to stay.
‘Even before the new Johnson-led government came into being, it looked highly questionable that a balanced budget would be achieved by the mid 2020s’