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Ed Holmes is the Senior Research Fellow for Economics and Social Policy at the think-tank Policy Exchange

The future of our public finances will be under the spotlight next week. George Osborne’s commitment at this year’s Conservative Party conference to “have a surplus in good times as insurance against difficult times ahead” will be fleshed out in the Autumn Statement. The detail (and how Labour respond to it) will form a key marker for the each of the party manifestos, any potential coalition deal and, ultimately, the key question of economic competence in the lead up to the general election.

However, what the fiscal rules themselves are is perhaps not as important as might first appear. We go through them at a rate of knots in the UK: Gordon Brown’s golden and sustainable investment rules, Alastair Darling’s 2008 temporary operating rule, the 2010 Fiscal Responsibility Act and, most recently, the Coalition’s fiscal mandate and supplementary target. All of these had their issues: either they were easy to “get around” through changing the terms, inadequate in achieving stable public finances, or simply missed without remedial action. George Osborne’s fiscal mandate is being met only by the technicality that it is a rolling five year target – without having to be met by a particular or the originally specified date.

Despite government spending restraint, over the next five years we are projected to borrow another £107.7 billion – that’s £107,700,000,000, the equivalent of the entire budget of the NHS – this year alone. With even the most generous assumptions, the government will both be spending more than it takes in, even excluding all borrowing for capital expenditure, and have a debt burden rising faster than the economy grows, until 2017/18.

Osborne is not inaccurate in referring to a past failure to “fix the roof when the sun was shining” – with public spending rising some four per cent a year in real terms from 1997 to 2010 – the largest increase of any comparable industrialised country. Rocketing public spending did not keep pace with tax receipts (much of it before the economic crisis), meaning the UK entered the financial crisis in 2007/8 with an already significant fiscal deficit. But whatever target the Chancellor sets, the wider issue is how to make these targets actually stick – an issue our new report published today, Money for Nothing, tries to address.

Like the rest of us setting ourselves a strict budget, but ending up buying treats on the credit card we cannot afford, sound public finances are easy to promise but difficult to commit to credibly. Short-term pledges to increase expenditure may be popular and effective for a government with short-term political time horizons. No government wants to “take away the punch bowl” during an economic boom and, in a recession, it is easy to make the case for ever-higher stimulus and to defer the prospect of moving to a sustainable fiscal path for another day.

To overcome this we suggest new tools both to “shame” governments which breach the fiscal rules, to make the passing of a non-compliant budget more difficult, and to make the rules more difficult to repeal. Where a target is missed, we propose that a Payback Mechanism is implemented so that the borrowing is paid back in subsequent budgets, so that governments can no longer move the UK to a higher level of indebtedness without definite plans to recover the shortfall within a politically relevant time horizon. Where the public finances are in breach of the rules, we propose triggering automatic emergency budgets to hold the government to account, increased time for Parliamentary scrutiny of non-compliant budgets, and triggering automatic freezes to tax allowance thresholds, public sector pay and benefit payments – not in expectation that these would actually be implemented, but to provide a strong incentive for a government to take remedial action in avoiding unpopular measures.

None of these reforms would interfere with the right of a democratically-elected government to breach its own fiscal targets if they chose to. But by making it more difficult, this would at least align short-term political interests with the long-term need for sound public finances.  Both the Conservatives and Labour might find it a useful tool to hold their opponents (and themselves) to account.

Money for Nothing: Rules to secure the UK’s fiscal solvency is published today by Policy Exchange

9 comments for: Ed Holmes: Whatever spending rules the Chancellor announces, we need to stick to them.

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