Wilkins Micawber told David Copperfield:
“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
Unfortunately, Micawber relaxed his Fiscal Rule and instead proceeded on the basis that “something will turn up” to avoid misfortune. He ended up in a debtors prison before going to Australia for a fresh start.
British Governments have also shown a temptation to ditch financial constraints. Harold Macmillan said:
“The real truth is that both a brake and an accelerator are essential for a motor car. Their use is a matter of judgment but their purpose must remain – to go forward safely. Or in economic terms, expansion in a balanced economy.”
Thus we had the era of stop-go. A temporary stimulus before an election in one Budget. Then the brakes slammed on in the next one forced by the Government running out of our money. The stop-go policy made it hard for British industry to make investment decisions, to modernise machinery and increase productivity. How could there be any confidence in getting a return on such investment with the economy so erratic?
Then we had Harold Wilson and the pound being devalued. Next, there was Ted Heath and the Barber Boom. Then we had Jim Callaghan and Denis Healey going “cap in hand” to the IMF.
Only when Margaret Thatcher became Prime Minister in 1979, did we see some kind of discipline restored to the public finances. For all the talk of cuts, there was an increase in public spending during her premiership. But it was kept under control, even if the phrase “fiscal rules” was not used. It was at an affordable, manageable level. While Macmillan compared the public finances to a car, Thatcher compared them to a household budget:
“When I was in Government before we did all our expenditure in what was called real terms, you know what I mean, you forgot all about inflation and you said we are entitled to so many schools, so many teachers, so many school meals, so many school books, etc., regardless of the price when it comes to it. So you did all of it in what was called volume terms and sometimes you could say, “Well look, if we’re going to have this amount of increase in pay we shan’t be able to have those number of books or buildings.” And they said, “Oh, don’t be so absurd, that doesn’t come in the Treasury calculations, we do it in volume terms,” and I was getting very unhappy then and I said well no-one in their sane senses says at home, “I can have three tons of coal, I can have twenty joints of sirloin a week, I can have so many clothes, regardless of the cost of those things.” You say, “I have got so much to spend and I have to have accordingly so much on food, so much on clothes, so much on holidays.”
“Now it’s only just in the last two years that we have gone from that volume expenditure regardless of cost to, say, “Look each department, this is going to be the amount of cash you’re going to have this year and we can tell you for the next four years. We can tell you the amount we’ve built in for increase in pay, the amount we’ve built in for increase in inflation but because we’re pulling down the amount of inflation you’re not going to get full compensation for everything. We want inflation down.” Now we’ve moved to that. There’s nothing, ought to be nothing, astonishing about this, this is the way every household has to budget, this is the way every business has to budget. But this is the way the Treasury never budgeted until now and this of course is much better control of public spending.”
Of course, some sneered at this comparison with a family budget as being terribly unsophisticated. Between 1979 and 1990 our National Debt fell, as a percentage of GDP from 44.5 per cent to 26.6 per cent. Instead of the Public Sector Borrowing Requirement (PSBR) we got used to talking about the Public Sector Debt Repayment (PSDR). But during the John Major and Ken Clarke era, public borrowing returned with a vengeance. Each year generous spending limits would be set – then even those would be cheerfully broken. By 1997 our National Debt was back up to 42 per cent.
But if anybody was worried about the Tories being profligate, would it not stand to reason that a Labour Government would be still more spendthrift? It was to provide reassurance (to the voters and the markets) on this point that New Labour started fiscal rules. In his Budget speech in 1997 our new Chancellor of the Exchequer, Gordon Brown announced:
“My first rule—the golden rule—ensures that over the economic cycle the Government will borrow only to invest, and that current spending will be met from taxation. My second rule is that, as a proportion of national income, public debt will be held at a prudent and stable level over the economic cycle. To implement those rules, I am announcing today a five-year deficit reduction plan. Those rules and that plan will ensure an historic break from the short-termism and expediency that have characterised the recent fiscal policies of our country.”
The second rule came to be known as “the sustainable investment rule”. It was set out in the Code for Fiscal Stability which was approved by the House of Commons in December 1998. It stated that public sector net debt as a proportion of GDP “will be held over the economic cycle at a stable and prudent level.” This meant that “other things being equal, net debt will be maintained below 40 per cent of GDP over the current economic cycle.” I suppose the “sustainable investment rule” is not quite as catchy as the “golden rule”. But older readers might recall references to “prudence with a purpose” or “no return to boom and bust”. Brown would always give himself some wriggle room with these rules. Would it be all right if “other things were not equal”? Who is to decide how long the “economic cycle” is? In 2009/10, the last financial year of the Labour Government the state ran a deficit of £155 billion. National Debt rose to 65 per cent of GDP. Brown presided over it zooming past a trillion pounds.
One might have concluded at this point that “fiscal rules” didn’t seem to amount to much. But new versions have been offered.
George Osborne became Chancellor of the Exchequer in 2010. He offered us his “fiscal mandate”. The independent Office for Budget Responsibility was established to keep track of his progress. In his Budget speech in 2010, Osborne declared:
“The formal mandate we set is that the structural current deficit should be in balance in the final year of the five-year forecast period, which is 2015-16 in this Budget. This mandate is structural, to give us flexibility to respond to external shocks; current, to protect the most productive public investment; and credible, because the OBR, not the Chancellor, will decide on the output gap. In order to place our fiscal credibility beyond doubt, this mandate will be supplemented by a fixed target for debt, which in this Parliament is to ensure that debt is falling as a percentage share of GDP by 2015-16. I can confirm that, on the basis of the measures to be announced in this Budget, the judgment of the OBR, which we published today, is that we are on track to meet those goals. Indeed, I can tell the House that, because we have taken a cautious approach, we are set to meet them one year earlier, in 2014-15. To put it another way, we are on track to have debt falling and a balanced structural current budget by the end of this Parliament.”
Yadder, yadder, yadder. National Debt in 2015 was 83.7 per cent of GDP, up from 82.1 per cent the year before. Of course, we are still waiting for a balanced budget. Though I suppose he gave himself a bit of Brownesque obfuscation. Who is to decide which bits of the deficit are “structural”?
By 2015, surely it would be obvious to all, that these pompously worded undertakings meant nothing? But Osborne decided the answer was to come up with new fiscal rule. These were embodied in a Fiscal Charter.
“Mandate for fiscal policy
In normal times, once a headline surplus has been achieved, the Treasury’s mandate for fiscal policy is:
- a target for a surplus on public sector net borrowing in each subsequent year.
For the period outside normal times from 2015-16, the Treasury’s mandate for fiscal policy is:
- a target for a surplus on public sector net borrowing by the end of 2019-20.
For this period until 2019-20, the Treasury’s mandate for fiscal policy is supplemented by:
- a target for public sector net debt as a percentage of GDP to be falling in each year.”
By the next year, Philip Hammond was the Chancellor of the Exchequer. He announced:
“In view of the uncertainty facing the economy, and in the face of slower growth forecasts, we no longer seek to deliver a surplus in 2019-20.”
Disappointing. But the good news was that we were getting some new fiscal rules:
“Today I am publishing a new draft charter for budget responsibility with three fiscal rules: first, that the public finances should be returned to balance as early as possible in the next Parliament and, in the interim, cyclically adjusted borrowing should be below 2% by the end of this Parliament; secondly, that public sector net debt as a share of GDP must be falling by the end of this Parliament; and, thirdly, that welfare spending must be within a cap set by the Government and monitored by the OBR. In the absence of an effective framework, the welfare bill in our country spiralled out of control, with spending on working-age benefits trebling in real terms between 1980 and 2010. As a result of the action that we have taken since 2010, that spending has now stabilised.”
But then Sajid Javid became Chancellor last year and he told us that the rules were to be replaced again:
“I’m announcing new fiscal rules that if elected will allow us to take advantage of the opportunity to invest in our future and our public services but without squandering the hard work of the British people.
“Like anyone who budgets whether it’s a household or small business or large business, I know that we must keep track of what we’re spending, and what we bring in.
“We can’t run an overdraft forever on day-to-day spending, so I can confirm that our first rule will be to have a balanced current budget. What we spend cannot exceed what we bring in.”
“Now, while we must retain spending if we want growth to continue and get stronger in the future, then we need to invest in it. Taking the opportunity offered by those historically low borrowing rates.”
“Investment in long-term projects like road and rail will not exceed 3% of GDP.”
That brings us up to date – and fevered speculation that Rishi Sunak might well have something to say about fiscal rules in the Budget next month. Does it really make any difference? There is something to be said for having a goal in life.
It could be worse. While in cash terms the National Debt keeps piling up, there has been some very modest progress in recent years with it falling as a percentage of GDP. It was 85.7 per cent in 2015. It is 84.0 per cent now.
But a lack of seriousness about sticking to the specific limits that are announced just invites ridicule. For the last 30 years, when it comes to the public finances, the diet always starts tomorrow.