Profligacy cannot go on indefinitely
The Chancellor will use next month’s Budget to introduce fiscal rules to control borrowing and, by implication, rein in profligate colleagues. Given the worrying state of the public finances, it is good that the highest levels of Government are finally addressing the challenge: the national debt stands at a staggering £2.2 trillion, or 99.5 per cent of GDP, which is the worst ratio in 60 years.
The fashionable consensus among some economists is that this is not a problem, that Covid necessitated the splurge, and that quantitative easing – in effect, pumping money into the economy – has had minimal inflationary impact. But it is unlikely that this extraordinary state of affairs can last forever. Inflation in the UK already made its biggest jump on record in August, to
3.2 per cent, and could soon reach 4 per cent. The Bank of England could counter price rises by increasing interest rates. But the Chancellor calculates that just a 1 percentage point rise would cost the public finances more than £25 billion. Hence the necessity of a new fiscal rule, one that will leave policy makers with nowhere to hide.
If a nation is not going to borrow, it has to raise taxes, cut spending or grow the economy. Mr Sunak will no doubt attempt all three, but without a clear economic philosophy flowing down from the top, voters struggle to see how he will pull it off – and it is unfortunate, to say the least, that the Government started with tax rises to finance health and social care. The crisis in both is real; the solution thus far has been depressingly unimaginative, punitive and likely to damage the business environment that provides the revenues necessary for public services.
If Plan A is to pray that the economy will bounce back of its own accord and cream off extra cash via tax rises, the bad news is that the UK’S recovery weakened over the summer. So, what is Plan B? Recovery will come from a combination of deregulation – making the most of the Brexit revolution – and leaving employers and employees with more money in their pockets to revive the private sector. Tax cuts are needed, not rises. In which case, considerable savings have to be made across departments, returning us to the very basis upon which David Cameron was elected in 2010. Governments must live within their means. The electability of Tory administrations, in particular, absolutely hinges upon it.