First published in the Telegraph on 19 November 2009
Let’s kick off with a multiple-choice question. Yesterday, the Queen announced that the next government will be forced, under a new Fiscal Responsibility Bill, to halve the budget deficit in four years. Afterwards, did the gilt markets – the ultimate judge of the Government’s financial credibility – a) breathe a sigh of relief, as Labour finally gave a concrete signal that it is serious about bringing the country’s books into order; b) lurch into chaos as it became clear that Downing Street still hasn’t formulated a proper plan to get out of the mess; or c) not bat an eyelid?
Doubtless, you’ve already guessed the answer: it was c). The international capital markets, which decide whether to consume the debt issued by this country, barely budged throughout the Queen’s Speech – and nor did the pound.
Gordon Brown’s handling of Britain’s public finances has been one long, highly depressing joke, which must make yesterday’s Fiscal Responsibility Bill the punchline. Having first buckled and then broken his previous fiscal rules (remember them?), Mr Brown apparently believes that the British public and investors around the world are credulous enough to take seriously a new rule that commits him to cutting the deficit. It is a testament both to investors’ good sense and the Bill’s irrelevance that markets around the world did the sensible thing yesterday and ignored him: after all, the chances are he won’t be around to impose it, anyway.
Now, none of this is to say that pledges to cut debt should not be applauded. Reducing the deficit is essential if Britain is to thrive in coming years. This is not simply because, if unchecked, the cost of merely financing Britain’s debt – the annual interest charges the government, and hence taxpayers, must pay out to those who own gilts – will become so large that they will dwarf annual spending on the Armed Forces. It is also a good idea because, with almost every other rich nation facing an unprecedented increase in deficits, those who act fastest and most credibly will attract more cash from overseas investors, bolstering their economies and giving them a head-start in the next economic cycle.
Trying to lay down rules against which a government’s fiscal performance should be measured is nothing new. The argument is that, because politicians are atrocious at controlling spending, they need some sort of check to ensure they do not allow the public finances to unravel.
Britain has experimented in this area in recent decades, even putting in place external institutions designed to enforce discipline. But a study of budget crises throughout history in the developed world, published this week by the Policy Exchange think tank, shows that neither legislation nor fiscal watchdogs (such as the Office of Budget Responsibility proposed by the Tories) make much difference. In the end, nothing is a substitute for the simple political will to balance the books.
Which is what makes yesterday’s announcement so patently ridiculous.
According to Treasury minions, enshrining in statute the commitment to cut the deficit will lend it an immutable force that didn’t exist in the previous fiscal rules, which were a “code” rather than a “law”. If the Government planned to increase deficits in the next few years, they add, it would have to go through the long-winded process of changing primary legislation or accept that it was committing an illegal act.
They point to Germany, which recently put in place a similar measure, but this ignores the fact that its policy-makers are already contemplating cutting taxes, threatening to break the rule in its very first year. By adopting a fiscal responsibility law, Britain is also following in the rather less distinguished footsteps of Nigeria, Brazil, India and Ghana.
So this is a plan which smacks not merely of political spin, but also of economic ignorance. The Government could do little to control the size of the deficits this year, since they are less a product of a sudden spurt in spending than a shocking collapse in tax revenues. If the economy lurches into a second leg of recession, as some economists predict, ministers would either have to override the new Act or ignite a public sector bonfire of a type we haven’t seen since the 1930s. A 20 per cent pay cut for teachers? All benefits chopped by a fifth? These things happened in 1931, and should Britain choose to wrap itself in a fiscal straitjacket, they could happen again.
Of course, this relies on the assumption that the government of the day would treat the statute book with the respect it deserves. But look at how, over the past 12 years, Labour has polluted Britain’s framework of laws with pointless political detritus.
The will to slash budget deficits is strong and growing by the day: there is no excuse for sullying the statute book with a law as gratuitous, cynical and politically motivated as this.